Software Stocks: The Rally Faces Its First Real Test​
​August 25, 2026

Software has staged one of the sharper recoveries of the summer. The iShares Expanded Tech-Software Sector ETF (IGV) has climbed roughly 18% since its July 23 low, meaningfully outperforming the Nasdaq 100 and the Magnificent Seven over that stretch.

The bounce follows a painful first half in which AI disruption fears compressed valuations across the sector. Investors worried that generative and agentic AI would erode pricing power and seat-based models in traditional enterprise software. That narrative is now being stress-tested by actual results showing AI as an additive revenue stream rather than pure cannibalization.

What’s Driving the Move

Two forces are at work. First, capital has rotated out of semiconductors and pure AI infrastructure names as investors reassess the durability of hardware spending cycles. Second, recent earnings from several software platforms have delivered concrete AI monetization metrics that the market can underwrite:

• ServiceNow crossed $1 billion in AI annual contract value, with subscription revenue growing 23% in constant currency and current remaining performance obligations up more than 21%. Renewal rates remain exceptionally high.
• Microsoft continues to show Azure and Copilot scale translating into revenue, with operating income growth outpacing top-line growth—an illustration of classic software operating leverage.
• Salesforce and others have pointed to Agentforce and related AI offerings contributing meaningfully to net-new ARR.

BofA and others have begun raising price targets on a group of names as the extinction narrative cools, though the bank remains more cautious on Adobe, where AI-first ARR is still a small percentage of the total and competitive intensity in creative tools remains elevated.

Today’s Catalyst: Intuit

Intuit reports fiscal fourth-quarter results after the close. Consensus sits near $4.27 billion in revenue (roughly +11.5% year-over-year) and non-GAAP EPS of about $3.59 (roughly +30%). Management has guided revenue growth of 11–12% for the quarter.

This is a clean test of whether a scaled software platform with high incremental margins and sticky workflows can continue compounding while integrating AI into tax, accounting, and small-business tools. Watch guidance for fiscal 2027, any commentary on AI contribution, and free-cash-flow conversion. Intuit has already demonstrated the ability to expand margins even while investing; a clean print would reinforce the broader sector recovery.

A Simple Framework for Software in This Environment

The companies most likely to sustain the rally share a few characteristics:

1. High operating leverage — Fixed-cost bases mean that incremental revenue (especially from AI upsells or usage-based layers) drops through at elevated rates once scale is achieved. Look for expanding operating margins and strong free-cash-flow conversion rather than pure top-line growth.
2. Platform moats with switching costs — Workflow systems embedded in daily operations (ServiceNow, certain Salesforce modules, core Intuit products) are harder for pure AI agents to displace quickly.
3. Demonstrable AI revenue that is additive — Clear disclosure of AI ACV, ARR contribution, or seat/usage expansion without obvious cannibalization of the core business.
4. Valuation that still reflects skepticism — Public SaaS multiples remain well below historical averages (median ARR multiples near the mid-to-high 3x range in recent readings). Quality names with durable growth and leverage can re-rate meaningfully if the narrative continues to improve.

Cybersecurity and infrastructure-adjacent software have generally held up better than pure application software throughout the year, reflecting the “scaffolding” demand created by AI deployment itself.

Risks Still Present

The sector is not out of the woods. Customer capex prioritization toward AI hardware and infrastructure can still delay software deals, as IBM’s earlier miss illustrated. Competitive intensity from AI-native tools remains real in some categories. And the recent move in IGV has been sharp enough that a soft set of earnings or guidance could trigger a quick pullback.

Still, the combination of compressed valuations, improving AI monetization evidence, and the inherent operating leverage of scaled software platforms creates an asymmetric setup for patient capital. Earnings this week—starting with Intuit tonight—will provide the next data points on whether the summer rally has legs or was simply a relief bounce.

Focus on the names that convert revenue growth into free cash flow at high rates. In software, that has always been the durable edge.