The S&P 500 software and services index climbed 1.3% on Tuesday to its highest level since November 2025, as strong earnings and AI-lab partnerships ease fears that artificial intelligence would disrupt the sector. Cybersecurity names led the rebound, while analysts flagged risks further out.
The S&P 500 software and services index rose 1.3% on Tuesday to its highest level since November 2025, after posting its biggest quarterly jump in July-September since the second quarter of 2020. The move comes as several analysts say fears over AI-led disruption in the sector were largely overstated.
Earnings growth accelerates
Strong earnings from software companies such as Salesforce, ServiceNow and Accenture, along with partnerships with AI labs, helped fuel a recovery in the sector that had been underway since late June. The sector's expected annual earnings growth rate for 2026 has climbed to 20.6%, up from 13.8% at the end of March, according to LSEG data.
According to Reuters: "AI has been more of an enabler for a lot of these software companies", said Adam Turnquist, chief cross-asset strategist at LPL Financial. He added that software has recaptured market leadership, with a window opening for the sector to outperform semiconductors.
Cybersecurity stocks stand out
Cybersecurity names have led the rally, with Crowdstrike, Fortinet and Palo Alto Networks notching triple-digit percentage gains this year as companies spend heavily on cybersecurity in the age of AI. The software index is up 5% this year. The Philadelphia SE Semiconductor index, meanwhile, has surged 87.5% in 2026 but remains well off its highs.
"SaaSpocalypse" fears fade, but risks persist
The software index had lost more than 26% from late January to its lowest point in April, in a selloff dubbed "SaaSpocalypse," driven by fears that companies could build applications in-house more cheaply using AI. Rebecca Wettemann, CEO of technology research firm Valoir, said the fear ran ahead of the evidence, adding that vendors were reporting customer uptake as AI adoption moves beyond the experimental stage.
Still, risks to the sector persist as the technology keeps evolving. 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.
Source: Investing.com
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