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Photo by ANGELA WEISS / AFP via Getty ImagesSoftware investors are betting that struggling stocks have found their footing again after a strong performance over the past month.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorSince hitting a near-term low on July 23, the iShares Expanded Tech-Software Sector ETF, better known by its ticker IGV, is up 17 per cent, far outperforming the technology-heavy Nasdaq 100 index and the Magnificent Seven tech giants.Meanwhile, software and services is by far the best performing group in the S&P 500 index in that time, soaring more than 20 per cent in a month while the broad equities benchmark gained just 3.3 per cent. Leading up to the July 23 low, it was the third-worst group in the S&P 500 this year, tumbling 22 per cent due to pessimism surrounding software developers in a world dominated by artificial intelligence.Breaking business news, incisive views, must-reads and market signals. Weekdays by 9 a.m.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Posthaste will soon be in your inbox.We encountered an issue signing you up. Please try again“Results have given investors a first-hand look at whether AI is actually disrupting these businesses, and so far, it doesn’t seem like they’re seeing growth slow or their margins compressed,” said Greg Martin, co-founder and managing director of Rainmaker Securities.Sentiment has been improving as AI doesn’t seem to be eroding the industry’s growth prospects, at least not yet. At the same time, more investors are finding software’s relatively cheap market valuations attractive, especially with the potential for many companies to become takeover targets. For example, private equity firm Silver Lake is reportedly in talks to buy Workday Inc. Although the deal hasn’t been confirmed, the mere existence of the rumor is considered a bullish signal.“If a sophisticated buyer like Silver Lake is interested, that’s evidence that the worst-case disruption scenario isn’t being seen,” Martin said.The recent move has even unwound a popular stock market trade this year that involved buying shares of chipmakers, which are the biggest beneficiaries of the flood of spending on AI, and shorting software firms, which are considered at risk from the technology. Over the past month that has reversed, with the S&P North American Expanded Technology Software index leaping 19 per cent since its July 23 low, while the Philadelphia Stock Exchange Semiconductor index, or SOX, is down 4.9 per cent over that stretch.Profits have been strong so far this earnings season. Thirteen S&P 500 software companies that have reported results have beat estimates by an average of 10 per cent and only one company missed on revenue, according to data compiled by Bloomberg.“AI disruption risk is not resolved, but resilient 1H26 earnings (financial performance for the first half of fiscal year 2026), an increasingly diverse foundational model ecosystem, and emerging AI monetization into FY27 (fiscal year 2027) provide a better backdrop to be constructive on the sector,” Morgan Stanley analyst George Webb wrote in an Aug. 20 note.Among the recent standouts, Microsoft Corp. posted its fastest cloud-computing growth in four years in its July 30 report, sending the stock to its best day since October 2008. Palantir Technologies Inc. shares soared almost 30 per cent after the company’s results on Aug. 3, which featured a robust outlook due to what chief executive Alex Karp described as “otherworldly” demand.Software companies are expected to report a 15 per cent rise in 2026 earnings, a consensus that has been revised slightly higher in recent weeks, according to Bloomberg Intelligence data. Revenue growth is projected to be 14.6 per cent this year.With earnings improving and the S&P North American software index down nearly four per cent this year despite its recent gains, investors are likely to find some bargains. The index is trading for 27 times earnings projected over the next 12 months, down from its 10-year average of roughly 34.Among its components, Salesforce Inc. shares are selling for 14 times expected earnings, near their lowest ever and a significant discount to their 10-year average of 43. Workday is trading around 17 times forward earnings, also not far from its all-time low hit in June and well off its five-year average of 36. And Intuit Inc.’s multiple is less than 14, down from an average of 32 over the past decade.“The big question is whether this is a bargain or a mirage,” said Jack Ablin, chief investment strategist at Cresset Asset Management, which owns shares of IGV. “The initial draconian view was too extreme, but the jury is still out on the ultimate impact of AI on software. And right now we’re looking to avoid areas that have this kind of controversy.”At this point, merger speculation is a key driver of enthusiasm for the group. There have been nearly US$364 billion of completed U.S. software deals this year, a 98 per cent increase from a year ago when the M&A market was largely closed, according to data compiled by Bloomberg. The prospect of deep-pocketed private equity investors or larger technology companies bidding on some of these companies is giving the group a broad boost.“There’s so much money out there chasing deals,” said Rainmaker’s Martin. “The prospect of more M&A or consolidation will help put a floor under software valuations.”With assistance from Yiqin Shen, Subrat Patnaik, Neil Campling and David Watkins Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.