Software shares regain ground on earnings, AI caution

Software shares are rebounding after posting stronger-than-anticipated earnings and as cautious attitudes toward rapid artificial intelligence development ease market concerns. The iShares Expanded Tech-Software Sector ETF has risen about 17% since the end of the first half, reversing a 14% decline during the opening six months of 2026, when AI-focused investments were popular.

Meanwhile, the Philadelphia Semiconductor Index has fallen roughly 19% as chipmaker demand waned. Software companies in the S&P 500 all beat profit expectations in the recent earnings season, with the average surprise exceeding 13%. Over 80% reported revenue above forecasts, countering the notion that generative AI was already shrinking demand for established enterprise software.

Microsoft reported quarterly revenue of $90 billion for the three months ended June 30, up 18% from a year earlier, while Azure and other cloud services revenue rose 43%. Microsoft Cloud revenue increased 27% to $59.3 billion, suggesting that established software and cloud platforms can profit from AI demand rather than be replaced by it.

Salesforce upgraded its annual revenue and profit forecasts following its fiscal second-quarter results, with revenue rising 11% to $11.35 billion. The company also expanded its partnership with Anthropic through Claudeforce, linking Salesforce data and workflows with Claude models, which boosted shares.

ServiceNow also delivered encouraging results, with subscription revenue rising 24.5% from a year earlier to $3.88 billion and total revenue increasing 24% to $3.99 billion. The company announced that its AI business reached $1 billion in annual contract value during the quarter and raised its full-year subscription revenue outlook.

The positive momentum has reshaped the market debate, with investors now distinguishing between software companies with entrenched enterprise data, recurring contracts, and distribution and those with weaker application offerings. Snowflake and Palantir also benefited from stronger growth and optimistic guidance.

The shift in sentiment was further fueled by leading AI executives cautioning against overly aggressive development of powerful models due to safety and misuse concerns. Anthropic CEO Dario Amodei has advocated for a slower pace of development, while other industry leaders have supported stronger safeguards. This cautious stance encouraged a sharp rotation on Monday, with the software ETF jumping roughly 5% while the semiconductor index dropped 5.9%, the widest one-day performance gap since comparable data began in 2001.

Cybersecurity shares have also performed strongly, with a Goldman Sachs basket of cybersecurity stocks rising about 65% this year, reflecting expectations that more capable AI systems will drive demand for security, monitoring, and identity-protection software. However, the rebound does not eliminate longer-term worries. AI agents are becoming increasingly capable of writing code, automating workflows, and replacing tasks once performed through conventional software interfaces, raising questions about pricing, seat-based subscription models, and whether customers will require as many standalone applications.

Despite these challenges, analysts anticipate earnings momentum to remain robust. Current estimates project earnings growth of about 13.8% for the S&P 500 software and services sector in 2027 and 20.8% in 2028, with revenue growth also expected to accelerate.