At the start of the year, a wave of artificial intelligence (AI) anxiety swept through software stocks.
The fear was simple. If powerful new AI models can write code, build apps and automate everyday tasks, what happens to the companies that charge a monthly subscription for doing exactly that?
The market sold first and asked questions later, a move quickly dubbed the "SaaSpocalypse".
Back in February, we said the idea that software is dead was an opportunity, but not equal across the sector. Nine months later, the data backs that up. Now, while the sector has broadly rebounded, the winners and losers are starting to take shape. For the purposes of this article, we’re only looking at the S&P 500, there are other software companies out there.
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What happened?
To cut through the noise, we grouped the S&P 500's current software companies into seven buckets, from Cyber Security to Design & Creative Tools. We then tracked how each bucket performed, giving every company an equal weighting.
On that basis, the average software stock fell 27% from the end of 2025 to its low on 10 April. That's a big drop. What's more telling is that the wider S&P 500 fell just 7% at its worst point to date this year.
This wasn't a market-wide panic. It was a targeted repricing of one sector, with money rotating into other areas of the market.
Crucially, this wasn't driven by collapsing profits, because results were broadly fine. Investors were marking down what software might be worth several years from now and paying less because of that uncertainty.
Where are we now?
The headline picture is better than many feared. Our all-software bucket has since won back around 94% of what it lost and is now down less than 2% for the year.
But "almost back" isn't the same as back. The S&P 500 is up 13% so far this year, so software is still trailing by around 15 percentage points. Past performance is not a guide to future returns.
Median forward P/E ratio
Bucket | Start of 2026 | All software trough | Today | Re-rating status |
|---|---|---|---|---|
The Tech Giants | 26.3 | 18.7 | 20.0 | Partly re-rated |
Cyber Security | 27.1 | 24.8 | 46.8 | Valuation fully restored |
Workplace & Business Apps | 20.4 | 14.6 | 16.6 | Partly re-rated |
Design & Creative Tools | 24.2 | 17.3 | 15.4 | Still de-rated |
Data & AI | 57.5 | 45.5 | 88.2 | Valuation fully restored |
Industry Specialists | 26.6 | 16.2 | 18.5 | Partly re-rated |
Consumer & Internet | 37.6 | 22.6 | 16.2 | Still de-rated |
All Software (median) | 26.6 | 17.5 | 16.7 | Still de-rated |
Valuations tell a similar story.
As above, the median forward price to earnings (P/E) ratio across our group was 26.6 times at the start of the year. Today it's 16.8 times, lower than at April's share price lows. That means much of the rebound has come from rising profit forecasts, not from investors being willing to pay up again.
Not all software is equal
Averages hide the real story, and the range of outcomes across our buckets is striking.
Racing ahead
Cyber Security is up 66% this year so far and Data & AI is up 10%. Both have more than recovered, and that makes sense. Every new AI agent is something else that needs protecting, and AI runs on data. So, the companies that secure, organise and monitor data are seeing demand rise, not fall. And investors have noticed, with the median Cyber Security forward P/E up from 27 times to 47 times.
Getting there
Workplace & Business Apps and the Tech Giants are on the mend, but not there yet.
Workplace & Business Apps have won back 83% of their losses and are down 6% this year. The worry here is "seat compression". If AI means businesses need fewer staff, they also need fewer software licences.
The Tech Giants have won back 63% and are down 11%. They face a different question. How quickly their enormous AI spending turns into profit.
Still under pressure
Three buckets are lagging. These are the areas where AI is most easily seen as a substitute, like generating images and designs, building websites or helping with everyday tasks like tax returns.
Industry Specialists have won back 41% of their losses.
Design & Creative Tools have won back 32%.
Consumer & Internet have won back just 11% and are still down 30% this year.
What do we need to see next?
For the laggards to join the recovery, we think four things matter:
Proof that AI adds revenue, not just cost. Investors want to see customers paying for AI products, ideally with pricing that moves beyond per-user charges toward usage or outcomes.
Steady customer numbers. Retention rates and seat counts are the early warning lights. If retention falls below 100%, customers aren’t renewing, and that would be the real red flag.
Profit margins holding up. AI is expensive to run. We still think more of the value in this cycle will flow to hardware than it did in the internet era, so software companies need to show they can pass those costs on.
A run of clean quarters. It’s hard to prove that your business won't be disrupted, especially when the pace of innovation in AI is so fast. Delivering consistent results is the only way to bring investors back on side, but it will take time.
What’s next?
Our view hasn't changed since the start of the year.
The idea that software is dead was and still is nonsense. What the market is doing is separating the strong from the vulnerable, and the dividing line is exactly where we expected it.
Businesses whose edge is proprietary data, a deep knowledge of how their customers operate, or regulatory lock-in are holding up well and, in some cases, thriving. AI makes these companies more useful, not less.
But if a company's competitive advantage is not one of those three, it's under pressure. That includes a company whose edge is a nice interface, or a task an AI agent could soon do. For those businesses, a lower valuation alone may not be enough to fix things.
For investors, that means being selective. The sell-off created opportunities, but the recovery shows the market is rewarding strong moats, not simply depressed valuations.
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