Software stocks get an earnings gut check after hot summer rally

Traders work on the floor of the New York Stock Exchange (NYSE) at the opening bell in New York on July 27, 2026. Photo by ANGELA WEISS / AFP via Getty Images

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Software investors are betting that struggling stocks have found their footing again after a strong performance over the past month.

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Since hitting a near-term low on July 23, the iShares Expanded Tech-Software Sector ETF, better known by its ticker IGV, is up 17 per cent, far outperforming the technology-heavy Nasdaq 100 index and the Magnificent Seven tech giants.

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Meanwhile, software and services is by far the best performing group in the S&P 500 index in that time, soaring more than 20 per cent in a month while the broad equities benchmark gained just 3.3 per cent. Leading up to the July 23 low, it was the third-worst group in the S&P 500 this year, tumbling 22 per cent due to pessimism surrounding software developers in a world dominated by artificial intelligence.

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“Results have given investors a first-hand look at whether AI is actually disrupting these businesses, and so far, it doesn’t seem like they’re seeing growth slow or their margins compressed,” said Greg Martin, co-founder and managing director of Rainmaker Securities.

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Sentiment has been improving as AI doesn’t seem to be eroding the industry’s growth prospects, at least not yet. At the same time, more investors are finding software’s relatively cheap market valuations attractive, especially with the potential for many companies to become takeover targets. For example, private equity firm Silver Lake is reportedly in talks to buy Workday Inc. Although the deal hasn’t been confirmed, the mere existence of the rumor is considered a bullish signal.

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“If a sophisticated buyer like Silver Lake is interested, that’s evidence that the worst-case disruption scenario isn’t being seen,” Martin said.

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The recent move has even unwound a popular stock market trade this year that involved buying shares of chipmakers, which are the biggest beneficiaries of the flood of spending on AI, and shorting software firms, which are considered at risk from the technology. Over the past month that has reversed, with the S&P North American Expanded Technology Software index leaping 19 per cent since its July 23 low, while the Philadelphia Stock Exchange Semiconductor index, or SOX, is down 4.9 per cent over that stretch.

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Profits have been strong so far this earnings season. Thirteen S&P 500 software companies that have reported results have beat estimates by an average of 10 per cent and only one company missed on revenue, according to data compiled by Bloomberg.

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“AI disruption risk is not resolved, but resilient 1H26 earnings (financial performance for the first half of fiscal year 2026), an increasingly diverse foundational model ecosystem, and emerging AI monetization into FY27 (fiscal year 2027) provide a better backdrop to be constructive on the sector,” Morgan Stanley analyst George Webb wrote in an Aug. 20 note.