October 6, 2026, (Inside AI) — US software stocks climbed to fresh 2026 highs on Tuesday, as stronger earnings expectations and a wave of AI partnerships convinced investors that the sector's worst fears about AI-driven disruption were overblown.
The S&P 500 software and services index rose 1.3% to its highest level since November 2025, capping its biggest quarterly gain since the second quarter of 2020. The rally marks a sharp reversal for a sector that had been written off earlier this year as AI tools threatened to make traditional software obsolete.
At the center of the recovery are strong results from enterprise software giants including Salesforce, ServiceNow, and Accenture. Their earnings, combined with new partnerships with AI labs, have helped rebuild confidence since late June.
Cybersecurity names have led the charge. CrowdStrike, Fortinet, and Palo Alto Networks have each posted triple-digit percentage gains this year, as enterprises ramp up spending to defend against AI-powered threats.
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"AI has been more of an enabler for a lot of these software companies, more than a disruptor," said Adam Turnquist, chief cross-asset strategist at LPL Financial.
"We're seeing more of a trend change now where software has recaptured the leadership reins, and we think there's a window here for outperformance in software over semiconductors."
The software index is up 5% this year, while the Philadelphia SE Semiconductor index has surged 87.5% in 2026, though it remains well off its highs. The gap underscores how much ground software still has to recover.
Earnings expectations have moved sharply higher. The sector's projected annual growth rate for 2026 has climbed to 20.6%, up from 13.8% at the end of March, according to LSEG data.
The 'SaaSpocalypse' That Never Arrived
The turnaround follows a brutal selloff earlier this year. From late January to its April low, the software index lost more than 26% in a decline traders dubbed the "SaaSpocalypse." The fear was simple: companies would use AI to build applications in-house far more cheaply, gutting demand for packaged software.
Analysts now say that fear ran ahead of the evidence.
"The whole SaaSpocalypse didn't happen anywhere near as fast as some of the people on Wall Street thought it would," said Rebecca Wettemann, CEO of technology research firm Valoir, adding that vendors were reporting customer uptake as AI adoption moved beyond the experimental stage.
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The shift reflects a broader pattern in enterprise technology. Rather than replacing software vendors, AI has largely been embedded into their products. Salesforce, ServiceNow, and others have rolled out AI agents and copilots that sit on top of their existing platforms, giving customers a reason to expand spending rather than cut it.
Cybersecurity has proven especially resilient. AI has expanded the attack surface for enterprises, from automated phishing to deepfake-enabled fraud. That has turned security budgets into a defensive necessity, not a discretionary line item.
Still, risks to the sector persist as the fast-evolving technology upends business models.
Brian Mulberry, chief market strategist at Zacks Investment Management, said the real test for software stocks could come in the second half of 2027, when more data center capacity might make AI coding a bigger threat to traditional software firms.
That timeline matters. As AI models grow more capable and compute becomes cheaper, the economics of building custom software in-house could shift decisively. For now, investors are betting that day remains distant.
The software rebound also carries implications for the broader market. Semiconductors have driven most of the AI trade's gains in 2026, but a rotation into software would broaden the rally beyond chipmakers. Turnquist's call for software to outperform semiconductors in the coming months suggests some investors are already positioning for that shift.
Whether the recovery holds may depend on whether AI remains a feature of enterprise software, or becomes its replacement.
