Software stocks staged a sharp rebound recently, with the iShares Expanded Tech-Software Sector ETF (IGV) surging around 14-15% from February lows amid hopes that the worst of the AI disruption fears had passed. However, the group has quickly faded again this week, turning negative and reminding investors of persistent skepticism. While some names like ServiceNow, Datadog, and Snowflake show stronger growth projections, broader concerns linger over whether AI will truly boost revenues and margins or continue pressuring valuations. Investors demand concrete evidence of sustained momentum before committing fully to the sector’s recovery.
Software Sector’s Fragile Rebound Amid Lingering AI Doubts
The software sector has endured a punishing stretch in recent months, hammered by fears that generative AI could disrupt traditional enterprise models and commoditize existing applications. After a deep selloff that saw many names drop 30% or more from peaks, the group flashed signs of life with a notable bounce. The iShares Expanded Tech-Software Sector ETF (IGV), a key benchmark for pure-play software companies, climbed roughly 14% off its February lows in a matter of weeks, marking one of its strongest short-term recoveries in nearly a year. This rally extended into early March, with the ETF posting its best weekly gain in months during one stretch, outperforming the broader market amid geopolitical tensions and energy sector shifts.
Individual performers fueled the optimism. Cloudflare, CrowdStrike, Datadog, Intuit, and Thomson Reuters all delivered double-digit gains from recent troughs. Larger players like Microsoft, Salesforce, and Oracle showed relative resilience, rallying an average of over 8% in certain periods while the S&P 500 lagged or declined slightly. Analysts pointed to stabilizing customer spending, rising share buybacks, and short covering as supportive factors. Some viewed the move as a relief rally, with fears of AI wiping out legacy software potentially overblown after announcements like new partnerships from AI firms such as Anthropic eased immediate concerns.
Yet the enthusiasm proved short-lived. This week, IGV has slipped back into the red, erasing much of the prior advance. Adobe’s recent earnings miss and unexpected CEO transition announcement served as a stark reminder of vulnerability, with the stock down over 25% year-to-date and trading near multi-year lows on longer charts. The pullback underscores a deeper market dynamic: investors remain in “guilty until proven innocent” mode when it comes to software equities.
The core hesitation stems from AI’s dual-edged impact. On one side, massive investments in AI infrastructure have driven explosive growth in semiconductors and cloud providers, but software companies face questions about monetization. Can incumbents leverage AI to raise pricing, defend margins, and unlock new revenue streams? Or will nimble AI tools erode demand for traditional SaaS subscriptions? Consensus estimates for the broader software group point to modest revenue growth around 4% for the coming year, far below the hyper-growth rates of prior cycles.
Certain sub-sectors and companies stand out with more constructive outlooks. ServiceNow is projected to deliver around 21% revenue growth in calendar 2026, while Datadog and Snowflake eye 20-27% expansion. Analysts highlight improving earnings reactions, with better-than-expected reports helping shift sentiment. The global software market itself is forecasted to grow at a compound annual rate of over 11% through the next decade, driven by ongoing digital transformation, rising IT spending projected to hit $6.15 trillion this year, and surging demand for AI-related tools.
Despite these tailwinds, valuations remain compressed after years of multiple expansion followed by sharp derating. Many software names trade at levels not seen in years, offering potential entry points for those betting on a sustained turnaround. Hedge funds have begun creeping back into positions after heavy selling, and buyback activity has picked up as companies defend their shares.
Key Software Stocks Performance Snapshot (Recent Trends)
Adobe (ADBE) : Down significantly year-to-date; recent earnings highlighted ongoing pressure.
Salesforce (CRM) : Mixed, with some stabilization but still facing AI scrutiny.
ServiceNow (NOW) : Stronger momentum, with high expected growth.
Datadog (DDOG) : Projected 20-30% revenue growth; among the more resilient.
Snowflake (SNOW) : High growth estimates around 27%.
CrowdStrike (CRWD) : Benefited from cybersecurity demand in the rebound.
Microsoft (MSFT), Oracle (ORCL), Salesforce : Large-cap anchors showing relative strength in volatile periods.
The path forward hinges on upcoming earnings seasons. Investors seek proof that AI enhances rather than cannibalizes core businesses—through higher deal sizes, expanded use cases, or margin accretion. Until then, software remains a high-conviction, high-risk area. The recent tease of a comeback highlights opportunity, but the quick fade serves as a caution that conviction requires results, not just relief.
Disclaimer: This is for informational purposes only and does not constitute investment advice, financial recommendations, or an endorsement of any security. Market conditions can change rapidly, and past performance is no guarantee of future results. Always conduct your own research or consult a qualified advisor before making investment decisions.