The "big test" for the U.S. stock software sector is approaching! After a summer surge, earnings reports will verify the strength of the rebound.

Over the past month, the U.S. stock market's software sector has shown strong performance, as investors bet that these previously underperforming stocks have regained their footing. This weeks upcoming earnings reports will be the key test to determine if this rebound is sustainable. Since hitting a recent low on July 23, the iShares Expanded Tech Software Sector ETF (IGV.US) has risen 18%, significantly outperforming the tech-heavy Nasdaq 100 index and the "Seven Giants." During the same period, the software and services sector has become the standout industry in the S&P 500, surging 24% in a month, while the overall benchmark index only climbed 3.3%. However, prior to the low on July 23, this sector was the third worst performer in the S&P 500 this year, as the market maintained a generally pessimistic outlook on the prospects of software developers in an AI-dominated landscape, with a peak decline of 22% within the year. This week, the market will face a flurry of important software company earnings reports, including those seen as potentially affected by AI. On Tuesday after the market closes, Intuit Inc. (INTU.US) will be the first to report its results; followed by Salesforce, Inc. (CRM.US) and CrowdStrike (CRWD.US) on Wednesday; and Autodesk, Inc. (ADSK.US) and Workday (WDAY.US) on Thursday. Greg Martin, co-founder and managing director of Rainmaker Securities, stated, "The earnings results will allow investors to closely examine whether AI is truly disrupting these businesses. So far, there seems to be no indication of slowing growth or profit compression." Currently, market sentiment is continuing to warm, and at least at this stage, AI has not eroded the growth prospects of the industry. Meanwhile, more and more investors are starting to favor the relatively undervalued software sector, especially considering that many companies could become acquisition targets. For example, there are reports that private equity firm Silver Lake Partners is negotiating to acquire Workday. Although the deal has not been confirmed, the rumor itself is seen as a bullish sign. Martin pointed out, "If savvy buyers like Silver Lake are showing interest, it indicates that the worst-case disruption scenario has not materialized." This round of market activity has even reversed a popular hedge strategy earlier this yeargoing long on chip stocks (the biggest beneficiaries of AI spending) while shorting software stocks (thought to be vulnerable to AI disruption). Over the past month, the trend has reversed: since the low on July 23, the S&P North American Expanded Tech Software Index has surged 19%, while the Philadelphia Semiconductor Index has dropped 4.9% during the same time frame. Compilation data shows that U.S. companies have performed impressively in this earnings season. All 13 software companies that have reported in the S&P 500 exceeded expectations, with an average beat of 10%, and only one company missed revenue expectations. Morgan Stanley analyst George Webb wrote in a report on August 20, "The disruption risk from AI has not been eliminated, but the resilience of earnings in the first half of 2026, an increasingly diverse foundational model ecosystem, and the gradual emergence of AI monetization capabilities for fiscal year 2027 create a more favorable backdrop for those optimistic about the sector." For example, Microsoft Corporation (MSFT.US) reported on July 30 that its cloud computing business achieved its fastest growth in four years, resulting in the largest single-day stock price increase since October 2008. Palantir Technologies (PLTR.US) saw its stock surge nearly 30% after its earnings report on August 3, with CEO Alex Karp attributing the strong outlook to "extraordinary" demand. According to industry research data, the market generally expects software companies to see a 15% earnings growth in 2026, a forecast that has been slightly upgraded in recent weeks. This year's revenue growth rate is expected to be 14.6%. With earnings improving and despite the recent rebound, the S&P North American Software Index is still down about 3% for the year. Investors are likely to find several undervalued opportunities. The index currently has a price-to-earnings ratio of about 27 times anticipated earnings over the next 12 months, below its ten-year average of about 34 times. From the perspective of individual stocks, Salesforce, Inc.s share price corresponds to an expected earnings multiple of only 14 times, close to its historical low, and significantly lower than its ten-year average of 43 times. Workday's forward price-to-earnings ratio is about 17 times, similarly close to the historical low recorded in June, and well below its five-year average of 36 times. Intuit Inc.s P/E ratio is below 14 times, whereas its ten-year average stands at 32 times. Cresset Asset Management Chief Investment Strategist Jack Ablin (whose firm holds IGV) remarked, "The key question is whether this is a genuine value opportunity or just a mirage. The initial overly pessimistic bearish view was indeed too extreme, but the ultimate impact of AI on software is still uncertain. Currently, we tend to steer clear of such contentious areas." As it stands, acquisition expectations constitute a significant driver of enthusiasm for this sector. Compilation data indicates that so far this year, American Software, Inc. Class A has completed nearly $364 billion in transactions, representing a 98% increase compared to a nearly frozen M&A market during the same period last year. Deep-pocketed private equity investors or large tech firms may move to acquire some software companies, providing a broad boost to the entire sector. Martin from Rainmaker stated, "There is a significant amount of capital chasing deals in the market. More mergers or expectations of industry consolidation will provide a floor for software valuations."