After a bruising selloff earlier in the year, software stocks have surged back into favor. The iShares Expanded Tech-Software Sector ETF has climbed nearly 42% from its April lows, recovering much of the damage from a prior 30% decline that had briefly pushed sentiment into deeply negative territory. Despite the rally, the ETF remains slightly down—less than 2%—for 2026.
The shift in momentum reflects a growing belief that AI is not eliminating demand for software products, but instead accelerating it. Investors are now differentiating between companies that can successfully integrate AI into their platforms and those still reliant on traditional subscription-heavy pricing models tied to headcount.
Market participants have increasingly favored firms seen as better positioned for this transition, including Datadog, Palo Alto Networks, Synopsys, Oracle and Microsoft, all of which are viewed as early beneficiaries of AI-driven demand shifts.
“While AI is causing massive disruption, it is remapping the industry rather than destroying it,” said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta.
The recovery narrative gained traction after several months of pressure on the sector, when concerns mounted that generative AI tools could compress software margins or replace existing applications. However, that pessimism has eased as investors reassess how AI is actually being monetized within enterprise software ecosystems.
Sentiment improved further following stronger-than-expected results from companies such as Snowflake and MongoDB, which helped reignite confidence in the sector’s growth trajectory. “We always advise being selective,” said Thomas Blakey, managing director of software equity research at Cantor. But he added that “investors baked in a scenario that was too negative with regards to AI.”
A key psychological boost also came from Nvidia CEO Jensen Huang, who highlighted the expanding role of AI agents in enterprise ecosystems. Speaking at the Computex conference in Taipei, he said AI would significantly expand software usage.
“This is actually an incredible time to be a software company,” Huang said, adding that “AI agents will boost software demand as the ‘world is no longer limited by the number of people, therefore those agents are going to use more tools than ever.’”
That optimism briefly reignited buying across the sector, even as volatility persisted. The software ETF slipped 2.8% on Tuesday, weighed down in part by a 4.2% decline in Salesforce, which had rallied sharply the previous day amid enthusiasm over its AI-related investments and its ties to Anthropic.
Despite short-term swings, investors are increasingly focused on long-term positioning rather than near-term volatility. Many see AI as a catalyst that will widen the gap between winners and laggards in enterprise software.
Jonathan Cofsky, portfolio manager at Janus Henderson, pointed to Datadog as a standout, citing its usage-based pricing model and exposure to data center demand driven by AI workloads. The stock recently hit record highs and has nearly doubled this year, including a major one-day surge following upgraded financial guidance tied to strong security demand.
Security remains another focal point for investors. Doug Rogers of Eaton Vance highlighted Palo Alto Networks as a key beneficiary, arguing that rising cyber threats will support stronger pricing power. “As the number of potential threats and vulnerabilities and the awareness of those vulnerabilities increases, so should the price Palo Alto is able to charge for defending against them,” he said.
Palo Alto also reached record levels earlier in the week and remains up more than 61% year-to-date, underscoring the strength of the security trade within AI-linked software names.
Elsewhere, Oracle is gaining attention for its broad enterprise footprint, which investors believe gives it flexibility in refining AI-era pricing strategies. “More time to get their pricing model correct,” said Marc Dizard, chief investment officer at Huntington National Bank, noting that Oracle has rebounded strongly after earlier losses.
Microsoft remains a core holding for many portfolio managers despite mixed performance this year. While its shares are still down nearly 9% for 2026 after a deeper drawdown earlier in the year, analysts continue to view its Azure cloud platform and Copilot AI assistant as long-term growth drivers. “Given its size and breadth it's more than a survivor. It'll always be in the game,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.
As the sector digests rapid technological change, the prevailing view among investors is shifting away from existential concern and toward selective opportunity—rewarding companies that can turn AI disruption into scalable revenue growth.