The SaaSpocalypse Is Losing Steam. Wall Street Is Betting on These Software Stocks
Business software runs just about everything behind the scenes, from payroll and customer records to cybersecurity. Earlier this year, Wall Street was convinced AI would make much of it obsolete, sending software stocks into a steep selloff. Six months later, the same companies are rallying, and some of the banks that warned about AI disruption are changing their minds.
Software growth tells another story
SaaS revenue growth accelerated to 17.5% year over year in Q2 2026, its fastest pace in 15 quarters. Even excluding Microsoft and Oracle, growth held at 16.3%.
Much of that strength comes from companies charging more for AI features, introducing usage-based pricing, and selling additional subscriptions to existing customers. Expectations have improved, too, with 2026 sector growth estimates rising to 20.6% from 13.8% at the end of March.
The SaaSpocalypse loses steam
Earlier this year, investors feared AI would replace traditional software subscriptions, sending the sector down more than 26% between late January and April. But the businesses expected to suffer are finding ways to make money from the technology instead.
Microsoft, for example, has split Copilot into per-user subscriptions and usage-based tiers. Rather than eliminating existing software spending, AI is creating additional revenue opportunities for companies already serving corporate customers.
That shift has helped lift Paycom, DocuSign, Workday, Twilio, and Cloudflare, among others. Investors who once feared these businesses would lose customers to AI are reconsidering how much they could earn from it.
Wall Street changes its mind
Bank of America upgraded Salesforce by two notches to Buy and raised its price target to $285 from $160. Analyst Tal Liani argued that large companies are unlikely to abandon software handling critical data, workflows, and compliance requirements.
The bank also acknowledged that it had overstated the threat AI posed to established players. Salesforce strengthened its case in late August with solid quarterly results and a Claudeforce partnership with Anthropic.
JPMorgan expects the recovery to continue through Q3 earnings, favoring Microsoft, ServiceNow, Snowflake, and Cloudflare. It isn't bullish on everything, though, having downgraded HubSpot from Overweight to Neutral.
Where investors stand
For broader exposure, the iShares Expanded Tech-Software Sector ETF offers a basket of software stocks. The fund has gained roughly 36% over six months, compared with around 15% for the S&P 500.
Not every part of the industry is recovering for the same reason. Infrastructure software companies are benefiting from stronger earnings forecasts, while application software stocks are seeing investors pay higher valuations as confidence returns.
Large-cap SaaS stocks still trade at 9.5x enterprise value to sales, below their three-year average of 10.8x. That suggests valuations haven't fully returned to historical levels, even after the rally.
But investors aren't exactly getting in early. IGV is just 7% below its September 2025 peak, while large-cap application software indices have jumped an average of 42% since June ended.
Microsoft, Salesforce, and ServiceNow still trail the broader software ETF for the year, leaving investors with a more complicated question than whether AI will destroy software. The sector has already recovered much of its lost ground, so the next test is whether earnings can justify how far stocks have climbed.
