Software Momentum Gains Traction as Investors Rotate Out of Semiconductor Holdings
Software has spent most of 2026 in freefall, punished by fears that AI agents would make traditional software-as-a-service business models obsolete. That narrative is losing its grip. A sharp pullback in semiconductor stocks this week pushed investors toward beaten-down software names, triggering the sector's strongest momentum in months.
Rotation out of semis fuels the move
The iShares Semiconductor ETF fell 7.2% across two sessions, its worst two-day performance since April 2025. That capital didn't sit idle for long.
Janus Henderson portfolio manager Ana Chkhikvadze described the dynamic directly: "Investors reduced exposure to year-to-date winners in semiconductors and hardware, resulting in relative outperformance in the broader software space."
The shift played out on both sides of the Atlantic. European software stocks climbed 4.1% in a single afternoon session, with SAP surging 6.2% and Capgemini rising 5%. Tikehau Capital's Raphael Thuin pointed to compressed valuations following the sector's brutal early-2026 selloff as the pull drawing capital back in.
Software rallies with baggage
The iShares Expanded Tech-Software Sector ETFIGV has rallied more than 20% off its April lows and recently touched its highest level since January. It still sits down 12% on the year, which tells you how deep the hole was.
Cybersecurity has been the standout sub-sector.HACK, Amplify's cybersecurity ETF, is up 16% since Apr. 20, and bothPANW andCRWD are trading near all-time highs. Palo Alto NetworksPANW closed Apr. 10 near its 52-week low of $139.57, per Barron's, and has since recovered to trade just below its 52-week high. That kind of recovery in a matter of weeks is worth paying attention to.
Broader software names have also surged in May. DatadogDDOG and FortinetFTNT each climbed roughly 50% or more in the month, while Akamai TechnologiesAKAM and JFrogFROG posted even steeper gains in the same period.
ServiceNowNOW delivered the week's leading single-stock move. BofA Securities reinstated coverage with a Buy rating this week, arguing the company would "benefit from, rather than be replaced by, new AI solutions." Shares jumped 8.8% on the day, the stock's biggest single-session gain in more than a year, and extended those gains with another 6.8% rise the following day.
The recovery has limits
Tikehau Capital's Thuin was measured about what this moment actually means: "This is not yet an all-clear moment for the industry in our view." Greater volatility ahead is the base case, and most software names remain far below their 2025 highs.
Still, the narrative is shifting in ways that are hard to ignore. SAP launched a new software suite designed to help clients deploy AI agents, reframing a perceived competitive threat as a product opportunity. Jefferies analyst Charles Brennan wrote that the launch demonstrates SAP's pivot to place AI at the center of its offering and called the shares compelling value.
There's also an unusual data point adding to the buzz. A US Office of Government Ethics disclosure showed President Trump purchased between $1M and $5M worth ofNOW, AdobeADBE, and WorkdayWDAY on Feb. 10, per Barron's.
Small-cap names are joining the recovery too. AgilysysAGYS, a software provider, surged ~30% this week after posting quarterly earnings with record sales and strong subscription growth. CEO Ramesh Srinivasan cited "sweeping AI-related changes across the entire organization" as a driver of competitive momentum. Oppenheimer analyst Brian Schwartz noted the "strengthening business momentum" and wrote that if Agilysys keeps beating and guiding above expectations, "the stock should keep working."
The idea that AI agents would wipe out software companies hit the sector hard earlier this year and dragged valuations down with it. That view has started to soften, with the market now betting some software companies can adapt and grow with AI instead of getting steamrolled by it. Earnings will show whether the "SaaSpocalypse" fears were overblown or just delayed.