Is the Software Sector Making a Comeback?

After weathering a difficult stretch since last autumn, software vendors have been rebounding over the past few weeks. The sector has recently been under pressure amid fears that new AI tools, notably Anthropic's Claude Code and OpenAI's Codex, would lower barriers to entry across the industry. However, these concerns have failed to materialize in Q1 earnings reports.

The industry's recovery began in May following better-than-expected results from heavyweights such as AppLovin, Constellation Software, ServiceNow, and cybersecurity giants. Salesforce also surprised to the upside last week, announcing a massive $25bn capital return to shareholders alongside its Q1 results.

The momentum appears to be accelerating this Monday following comments from Nvidia CEO Jensen Huang, who stated that it is "a great time to be a software company," while noting that software "has to be presented to the [AI] agent in a way that the agent can use it."

On the technical front, the IGV ETF recently formed an "inverse head and shoulders" pattern, which, in technical analysis parlance, suggests the start of a major bullish reversal. Since its mid-April low, the IGV ETF has gained as much as the SOX semiconductor index (+40%).

Valuations, however, remain starkly different: the software segment is trading at approximately 20x-21x forward earnings, two standard deviations below its 10-year average, while the semiconductor segment trades at 29x forward earnings, two standard deviations above its 10-year average.

Despite a rally of nearly 40% in two months, there appears to be significant potential for further re-rating in the software space. However, much will depend on the ability of these companies to prove that AI is an asset rather than a threat to their business models.