Earlier this year, a fear psychosis had gripped investors that advances in AI would replace software firms, and the sector was all but written off.
Anthropic’s launch of new plugins for its Claude Cowork system in February sparked a global selloff in software firms, with the US markets alone losing $300 billion in market value in a day.
The pressure did not leave the sector for a while, and a new phrase called ‘SaaSpocalypse’ started being circulated, signaling the imminent doom of the software sector.
However, the latest earnings season has shown that software companies are not going anywhere.
Ironically, AI, which had seemed to sound the sector’s death knell, is helping the industry rewrite its next growth story.
Late last month, the iShares Expanded Tech-Software Sector ETF (IGV) broke into positive territory on a year-to-date basis, powered by a particularly strong earnings beat from software bellwether Salesforce.
The ETF is up about 10% in the last one month.
The State Street Software and Services ETF, which tracks about 130 software and IT stocks, hit a new all-time high in August.
It is up 11% in the last one month and 10% year to date, after remaining under pressure until the end of July.
The recovery represents more than a simple reversal in investor sentiment.
It suggests that markets are beginning to distinguish between software companies that could be disrupted by AI and those that may actually benefit from it.
Snowflake offers a fresh signal for software investors
Snowflake shares surged nearly 25% on Thursday after the company raised its annual product revenue forecast, strengthening investor confidence that AI-related spending could become a powerful driver of growth for software firms.
The cloud data platform provider lifted its fiscal 2027 product revenue forecast to $6.07 billion from $5.84 billion and posted a 37% jump in second-quarter product revenue.
Its AI offerings accounted for “approximately half of the acceleration” in growth, according to CEO Sridhar Ramaswamy.
Snowflake’s coding assistant, Cortex Code, topped 9,100 accounts after adding more than 2,000 customers during the quarter, while enterprise chatbot CoWork expanded to 5,800 accounts.
The significance of the results goes beyond Snowflake itself.
They suggest that companies are beginning to spend more on software specifically because AI workloads require more data, automation, and computing infrastructure.
A third straight quarter of accelerating growth amid high expectations “underscore just how well AI is monetizing and driving greater consumption in the core platform,” Morgan Stanley analysts wrote.
Salesforce challenges the ‘SaaSpocalypse’ narrative
Salesforce has provided perhaps the clearest rebuttal to the idea that AI will simply eliminate enterprise software.
Salesforce shares jumped about 12% last month after the company raised its annual revenue and profit forecasts and expanded its partnership with Anthropic through a new artificial intelligence integration.
The company also reported higher second-quarter profit and revenue on rising demand for its artificial intelligence and data offerings.
Salesforce CEO Marc Benioff used the results to push back against the “SaaSpocalypse” narrative.
“This SaaSpocalypse narrative has been such nonsense,” Benioff told Cramer on CNBC’s “Mad Money.”
“Frontier models depend on CRM. They don’t replace it.”
According to Benioff, nine of the 10 leading artificial intelligence companies use Salesforce and Slack, with spending on the platforms increasing 435% from a year earlier.
The argument highlights one of the most important distinctions emerging in the software sector.
Companies with proprietary data, deeply embedded workflows and large installed customer bases may be harder to replace than smaller software providers whose products can be replicated by AI models.
Nicholas Frasse, product manager for thematic ETFs at VanEck, said that distinction is increasingly becoming important for investors.
“I don’t think all SaaS companies are created equal,” Frasse told MarketWatch.
“There are entrenched businesses like Salesforce that own a very proprietary set of data that make them much more formidable in this new era, and also probably a much bigger benefactor of the technology.”
That could mean the software sector is unlikely to move as one group going forward.
“Investors and the market have started to find the signal through the noise,” Frasse said.
“You’re starting to see much more nuanced activity around individual names depending on the individual business model, rather than systemic buying or selling of an entire category.”
ServiceNow and Workday show another side of the AI trade
ServiceNow has also emerged as a beneficiary of the shift in sentiment.
The company raised its forecast for annual subscription revenue for the second time in July after beating second-quarter revenue and profit estimates, driven by growing demand for its AI-powered software.
CEO Bill McDermott said he had not seen any change to sales cycles from increased hardware and AI spending.
ServiceNow said its AI platform has seen widespread adoption across the public sector, with nearly all 50 US states now using it to improve citizen services and modernize operations.
The company also crossed $1 billion in annual contract value for its AI offerings.
Workday is seeing a similar trend.
Shares of the finance and human resources software provider soared after the company reported higher profit and rising revenue in its fiscal second quarter, driven by growing adoption of its artificial intelligence agents.
Workday has been embedding AI across its platform to automate tasks ranging from payroll processing to financial forecasting, with the aim of increasing efficiency for customers.
“We had a strong Q2, with AI driving more than 25% of our new ACV and more than 5,500 customers now using at least one of our organic agents,” co-founder and Chief Executive Aneel Bhusri said.
Chief Financial Officer Zane Rowe added that AI is driving Workday’s customer expansion.
Cybersecurity is emerging as another AI winner
Another category of software companies is benefiting from the heightened cybersecurity risks that AI has ushered in.
CrowdStrike shares jumped more than 9% after the cybersecurity company beat second-quarter earnings expectations and raised its full-year revenue forecast, as businesses stepped up spending to protect against increasingly sophisticated threats linked to artificial intelligence.
Chief Executive George Kurtz described the quarter as a milestone for the company, pointing to the growing realization among enterprises that adopting AI also creates new cybersecurity risks.
The second quarter “was the best quarter in CrowdStrike’s history,” Kurtz said in a statement.
“The Mythos moment translated into mass-market acceptance that AI adoption needs security.”
“Every enterprise will run on AI, and securing it is the largest market opportunity in our history.”
CrowdStrike’s shares have already gained more than 66% this year, supported by expectations that rapid adoption of generative and agentic AI will expand the market for cybersecurity products.
Palo Alto Networks has also pointed to the same dynamic.
Chief Executive Officer Nikesh Arora said enterprises are increasingly recognizing that they need to modernize cyber defenses as AI models become more powerful, particularly following Anthropic’s release of Mythos.
“In that context, people are gravitating towards the largest players in the industry and looking at us to provide the antidotes to this development in AI,” Arora said in an interview.
The cybersecurity trade therefore offers a different way to play the AI boom.
Chip stocks see some decline as software rebounds but both reinforcing each other’s growth
The resurgence in software stocks is perhaps also coming at the cost of interest in the most red-hot trade — chip stocks.
The iShares Semiconductor ETF (SOXX) is down more than 7% in the last one month, even as software ETFs have rallied during the same time, as mentioned earlier.
Although SOXX remains up about 60% this year, the recent divergence represents a notable change in investor behavior.
Veteran technology investor Dan Niles, founder of Niles Investment Management, highlighted the shift in a recent post on X.
He noted that many AI investors had been bullish on semiconductors and bearish on software on the belief that AI would displace many point-solution software companies.
But the unwinding of that trade has produced a sharp reversal.
“But since the unwinding of the Momentum trade which started on 6/22 (I wrote about these concerns on 6/20), IGV has rallied 25% while the SOX Index has declined 22% through 8/28,” Niles said.
He also pointed to a potential new bullish argument for software: AI agents could access software tools far more frequently than human users.
“But a bullish twist on AI for the software sector introduced recently is that AI agents will access software tools ~10-100x more often than humans,” he said.
That could potentially create an entirely new source of software consumption, even as AI reduces the need for certain individual applications.
Can the software rally continue?
The biggest question now is whether the software rally is based on improving fundamentals or simply a reversal in positioning.
Mizuho desk-based analyst Jordan Klein argued that the latest rally has much more to do with “positioning” among institutional investors than anything particularly new in the core fundamentals.
A number of hedge funds and long-only growth managers had owned less software than the sector’s representation in the broader market, partly because of AI concerns and partly because software had become a “funding short” used to finance larger bullish positions in semiconductors and AI hardware.
That underweight positioning could leave room for further gains.
Based on this positioning, Klein believes software names could continue to climb higher well into September and October.
He expects Salesforce shares to move higher into its Dreamforce conference next month, although he cautioned that he would not “chase” the stock at current prices, instead preferring names such as ServiceNow and Microsoft.
The software sector’s comeback therefore appears more nuanced than a simple return to its pre-AI trajectory.
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