After a brutal start to the year, software stocks are staging a comeback, fueled by earnings that show artificial intelligence is driving real demand. The iShares Expanded Tech-Software Sector ETF (IGV) has climbed about 10% over the past month, while the State Street Software and Services ETF hit a record high in August, up 11% in the last month and 10% year-to-date.
The rebound marks a sharp reversal from earlier in 2025, when fears that AI would replace software companies triggered a massive selloff. In February, Anthropic's launch of new plugins for its Claude Cowork system wiped out $300 billion in market value from U.S. software firms in a single day. The term "SaaSpocalypse" began circulating, signaling doom for the sector.
But the latest earnings season has told a different story. AI, once seen as the sector's death knell, is now fueling its next growth phase. Companies like Salesforce, Snowflake, ServiceNow, and Workday are reporting strong results, with AI-related spending boosting demand for their platforms.
Snowflake's AI-driven growth
Snowflake shares surged nearly 25% after the company raised its fiscal 2027 product revenue forecast to $6.07 billion from $5.84 billion, and posted a 37% jump in second-quarter product revenue. CEO Sridhar Ramaswamy said AI offerings accounted for "approximately half of the acceleration" in growth. The company's coding assistant, Cortex Code, now has over 9,100 accounts, while its enterprise chatbot CoWork expanded to 5,800 accounts.
Morgan Stanley analysts noted that a third straight quarter of accelerating growth "underscore just how well AI is monetizing and driving greater consumption in the core platform."
Salesforce challenges the 'SaaSpocalypse'
Salesforce has been the clearest rebuttal to the idea that AI will eliminate enterprise software. Shares jumped about 12% last month after the company raised its annual revenue and profit forecasts and expanded its partnership with Anthropic. CEO Marc Benioff dismissed the "SaaSpocalypse" narrative, saying "Frontier models depend on CRM. They don't replace it." He noted that nine of the ten leading AI companies use Salesforce and Slack, with spending on those platforms up 435% year-over-year.
This highlights a key distinction: companies with proprietary data, deeply embedded workflows, and large installed bases may be harder to disrupt than smaller software providers whose products can be replicated by AI models. Nicholas Frasse, product manager for thematic ETFs at VanEck, told MarketWatch, "I don't think all SaaS companies are created equal. There are entrenched businesses like Salesforce that own a very proprietary set of data that make them much more formidable in this new era."
ServiceNow and Workday also benefit
ServiceNow raised its annual subscription revenue forecast for the second time in July after beating estimates, driven by demand for its AI-powered software. CEO Bill McDermott said sales cycles have not been affected by increased hardware and AI spending. The company's AI platform is now used by nearly all 50 U.S. states, and its AI offerings have crossed $1 billion in annual contract value.
Workday also saw a boost, with shares soaring after reporting higher profit and revenue in its fiscal second quarter, driven by adoption of its AI agents that automate tasks like payroll processing and financial forecasting.
The recovery suggests investors are becoming more discerning, distinguishing between companies that could be disrupted by AI and those that benefit from it. As Frasse put it, "Investors and the market have started to find the signal through the noise. You're starting to see much more nuanced activity around individual names depending on the individual business model."
Analysts say the rally could continue into September and October, but the sector is unlikely to move as a monolith. For investors, the key is to focus on companies with strong data moats and AI integration, rather than betting on the sector as a whole. As the AI trade continues to evolve, software names may offer a more stable play than some of the more volatile semiconductor stocks.
This article is for informational purposes only and does not constitute financial advice.
