By Joel Jose
Oct 6 (Reuters) - US software stocks are touching fresh 2026 highs, supported by a sharp rise in earnings expectations, which according to several analysts indicate that fears over AI-led disruption in the sector were largely overstated.
The S&P 500 software and services index rose 1.3% on Tuesday to its highest levels since November 2025, after posting its biggest quarterly jump in July-September since the second quarter of 2020.
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.
Cybersecurity stocks have stood out, 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.
"AI has been more of an enabler for a lot of these software companies, more than a disruptor," said Adam Turnquist, chief cross-asset strategist at LPL Financial.
"We're seeing more of a trend change now where software has recaptured the leadership reins, and we think there's a window here for outperformance in software over semiconductors."
The software index is up 5% this year while the Philadelphia SE Semiconductor index, home to many US chipmakers, has surged 87.5% in 2026, but is well off its highs.
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.
'SAASPOCALYPSE' FEARS OVERDONE
The software index lost more than 26% from late January to its lowest point in April, in a selloff dubbed "SaaSpocalypse", driven by fears that companies could use AI to build applications in-house more cheaply.
Analysts now say the fear ran ahead of evidence.
"The whole SaaSpocalypse didn't happen anywhere near as fast as some of the people on Wall Street thought it would," said Rebecca Wettemann, CEO of technology research firm Valoir, adding that vendors were reporting customer uptake as AI adoption moved beyond the experimental stage.
Still, risks to the sector persist as the fast-evolving technology upends business models.
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.
(Reporting by Joel Jose and Purvi Agarwal in Bengaluru; Editing by Sruthi Shankar and Arun Koyyur)
