Over the past month, the U.S. software sector has reversed its year-to-date losses with a sharp rally. Valuation appeal, merger and acquisition expectations, and earnings resilience have together formed the three main pillars supporting this rebound. The concentrated earnings releases scheduled for this week will serve as a key checkpoint for assessing the sustainability of this move. Meanwhile, the market remains divided on whether artificial intelligence will ultimately act as a disruptive threat to the software industry or serve as a medium- to long-term growth catalyst. While current sector valuations remain below historical averages, investors must carefully balance the appeal of undervalued opportunities against underlying risks. The ongoing acceleration of M&A activity provides a floor for valuations, but whether this can evolve into a sustained upward trend still requires further confirmation from earnings data and the progress of AI commercialization.
Investors are betting that these previously lagging stocks have now found stable ground. The iShares Expanded Tech-Software Sector ETF (IGV) has gained 18% since hitting a recent low on July 23, significantly outperforming both the tech-heavy Nasdaq 100 Index and the so-called “Magnificent Seven” stocks. Over the same period, the software and services sector emerged as the best-performing group within the S&P 500, surging 24% in a single month, while the broader benchmark index advanced only 3.3%. Prior to this rebound, however, the sector had been the third-worst performer in the S&P 500 for the year, having tumbled as much as 22% amid widespread pessimism over the outlook for software developers in a landscape increasingly dominated by AI.
This week, the market faces a heavy slate of earnings reports from several key software companies, including those perceived as potentially vulnerable to AI-related disruption. On Tuesday after the U.S. market close, Intuit (INTU) will release its results first. It will be followed by Salesforce (CRM) and CrowdStrike (CRWD) on Wednesday, with Autodesk (ADSK) and Workday (WDAY) rounding out the week on Thursday. Greg Martin, co-founder and managing director of Rainmaker Securities, noted that these earnings results will give investors a closer look at whether AI is genuinely disrupting these businesses. So far, he added, there appears to be no clear evidence of growth deceleration or margin compression.
Compiled data indicate that corporate earnings in this U.S. reporting season have been robust. All thirteen software companies within the S&P 500 that have posted results exceeded earnings expectations, with an average beat of 10%, and only one missed revenue projections. In an August 20 report, Morgan Stanley analyst George Weber wrote that while the risk of AI disruption has not dissipated, earnings resilience in the first half of 2026, an increasingly diversified ecosystem of foundation models, and the gradual emergence of AI monetization capabilities in fiscal 2027 together create a more favorable environment for a constructive view on the sector.
According to industry research data, the consensus estimate projects earnings growth of 15% for software companies in 2026, and this estimate has been slightly raised in recent weeks. Revenue growth for the current year is forecast at 14.6%. Despite the recent rally, the S&P North American Software Index remains down approximately 3% for the year, leaving investors with a number of potentially attractive valuation opportunities. The index currently trades at a price-to-earnings ratio of about 27 times expected earnings over the next twelve months, below its ten-year average of roughly 34 times. Looking at individual constituents, Salesforce trades at only 14 times forward earnings, near historic lows and far below its ten-year average of 43 times. Workday’s forward price-to-earnings ratio stands at about 17 times, significantly under its five-year average of 36 times. Intuit’s multiple is below 14 times, compared to its ten-year average of 32 times.
