Software Stocks Rally 40% From Lows as Chip Sector Corrects 17%

Software equities have reversed earlier bearish sentiment, surging over 40% from their April lows and outperforming the semiconductor sector by a wide margin. The iShares Expanded Tech-Software Sector ETF (IGV) posted a 15% gain over the past three months, while the iShares Semiconductor ETF (SOXX) declined 17% during the same period, signaling a decisive rotation away from high-momentum chip stocks. This shift challenges the narrative that software was rendered obsolete by artificial intelligence, with industry strategists arguing that software is essential for customizing AI tools for enterprise use.

Market Context

The broader technology sector is experiencing a divergence between hardware and software performance. While AI chip stocks dominated year-to-date gains previously, the recent quarter has seen a correction in semiconductor valuations. Micron (MU) is down more than 20% from its all-time high recorded in mid-June, and Sandisk (SNDK) has fallen over 30% from its summer record highs. In contrast, software names have attracted significant capital inflows, with Microsoft (MSFT) and Palantir (PLTR) each rising 30%, and Salesforce (CRM) gaining more than 50% during the three-month window.

Analysis

The rally in software is underpinned by the realization that AI adoption requires robust software infrastructure for customization and integration. Brian Mulberry, Zacks Investment Management chief market strategist, noted that the 'death of software' narrative was greatly overstated earlier this year, emphasizing that engaging with AI tools necessitates software to tailor those tools for specific business needs. Cybersecurity has emerged as a standout sub-sector within software, driven by the increased protection requirements for AI agents. Palo Alto Networks (PANW) and CrowdStrike (CRWD) have outperformed, rising roughly 30% and 40%, respectively.

Despite the recent underperformance of chip stocks, some portfolio managers view the selloff as an opportunity rather than a warning. Hendi Susanto, portfolio manager and research analyst at Gabelli Funds, highlighted that quality names are being sold alongside the broader market, creating entry points for AI infrastructure plays with attractive valuations. Susanto favors companies like Arista Networks (ANET), AMD (AMD), Nvidia (NVDA), Dell (DELL), and Hewlett Packard Enterprise (HPE), citing strong outlooks into 2027 where demand continues to outstrip supply. Meanwhile, tech executives including Anthropic CEO Dario Amodei, OpenAI CEO Sam Altman, and Tesla CEO Elon Musk have called for pacing the frontier of AI development, yet defensive spending on software remains a priority for enterprise leaders.

Key Numbers

- iShares Expanded Tech-Software Sector ETF (IGV): Up 15% over the past three months; up more than 40% from April lows.

- iShares Semiconductor ETF (SOXX): Down 17% over the past three months.

- Salesforce (CRM): Risen more than 50% during the three-month period.

- Microsoft (MSFT) and Palantir (PLTR): Both up 30%.

- CrowdStrike (CRWD): Up roughly 40%.

- Palo Alto Networks (PANW): Up roughly 30%.

- Micron (MU): Down more than 20% from mid-June all-time high.

- Sandisk (SNDK): Down more than 30% from summer record highs.

What to Watch

Traders should monitor whether the rotation from semiconductors to software continues or if the recent chip correction presents a bottom for high-beta AI hardware names. Key focus will remain on enterprise spending reports to validate the thesis that software integration is a non-negotiable component of the AI stack. Additionally, watch for further commentary from tech leaders regarding the 'pace the frontier' sentiment and its impact on capital expenditure guidance for the upcoming quarters.