DDOG, ORCL, MSFT emerge as top software stock picks as the sector rebounds: report

Software stocks are staging a strong comeback after a bruising selloff earlier this year, as investors increasingly bet that artificial intelligence will become a growth catalyst for the industry rather than a disruptive threat.

The turnaround has been swift.

The iShares Expanded Tech-Software Sector ETF (IGV), a widely followed benchmark for software shares, has surged nearly 42% from its April low.

The ETF, which had fallen as much as 30% earlier in 2026 amid concerns that AI could replace many traditional software functions, is now down less than 2% for the year.

The recovery reflects a shift in investor sentiment as market participants reassess how software companies may benefit from AI adoption instead of being displaced by it.

“While AI is causing massive disruption, it is remapping the industry rather than destroying it,” Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, told Reuters.

Investors reward AI-ready business models

The renewed enthusiasm is not lifting all software stocks equally.

Investors are increasingly gravitating toward companies that are successfully integrating AI into their offerings and adapting pricing structures to reflect actual usage rather than charging customers based primarily on employee headcount.

The distinction has become increasingly important as businesses deploy AI tools that can perform tasks traditionally handled by large workforces, potentially reducing the effectiveness of conventional subscription-based pricing models.

Analysts and portfolio managers cited by Reuters highlighted cloud security providers Datadog and Palo Alto Networks, chip design software company Synopsys, and technology giants Oracle and Microsoft as some of their preferred ways to play the theme.

The software rally gained momentum after a months-long selloff that many investors considered excessive.

As enthusiasm for AI-powered chipmakers and broader technology stocks intensified, bargain hunters began returning to software names that had suffered some of the steepest declines.

Earnings and Huang's comments add momentum

The recovery accelerated last week after strong earnings reports and upbeat forecasts from Snowflake and MongoDB improved confidence in the sector's outlook.

Another boost came on Monday when Nvidia CEO Jensen Huang delivered a bullish assessment of software demand during his keynote address at the Computex technology conference in Taipei.

Addressing concerns that AI agents could diminish the need for software applications, Huang argued the opposite.

“The world is no longer limited by the number of people, therefore those agents are going to use more tools than ever,” he said.

“This is actually an incredible time to be a software company.”

His comments helped fuel another wave of buying across software stocks, reinforcing the view that AI could create new markets and revenue streams rather than simply replacing existing products.

Security and cloud firms attract investor attention

Among the standout performers is Datadog, which has benefited from rising demand for security and monitoring tools used by AI-powered data centers.

Jonathan Cofsky, portfolio manager at Janus Henderson, said the company’s usage-based pricing model positions it well for the AI era.

Datadog shares have nearly doubled this year and recently hit a record high after the company raised its annual outlook.

Palo Alto Networks has also emerged as a favorite among investors. Even though the stock fell on Tuesday, it hit record high on Monday and is up more than 57% for the year.

Doug Rogers, portfolio manager at Eaton Vance, believes the growing complexity of cybersecurity threats will support stronger pricing power for the company.

“As the number of potential threats and vulnerabilities and the awareness of those vulnerabilities increases, so should the price Palo Alto is able to charge for defending against them,” Rogers told Reuters.

Oracle has also regained favor after recovering from sharp earlier losses.

Marc Dizard, chief investment officer at Huntington National Bank, said Oracle’s large customer base gives the company flexibility as it refines its AI monetization strategy.

Meanwhile, investors continue to view Microsoft as one of the safest long-term AI bets.

Despite its subscription-heavy revenue model, analysts point to growth opportunities from its Copilot AI assistant and Azure cloud platform.

“Given its size and breadth, it's more than a survivor. It'll always be in the game,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder.