UPDATE 1-US software stocks rebound, seeking to loosen AI's grip

Investors are likely to demand clearer evidence that software companies can ⁠defend their profit margins ⁠and business models from the competitive threat posed by AI. The iShares Expanded Tech-Software Sector ETF has lost 12.2% so far this year as of Monday's close.

Shares of several U.S. software stocks gained ​on Tuesday, as the industry attempts ‌a ​comeback after being battered for much of the year on fears of disruption from artificial intelligence. The beleaguered sector's rebound coincided with a slide in chipmakers, which began ‌to cool off following a blistering rally that took the Philadelphia SE Semiconductor Index to a record high earlier this month. The iShares Expanded Tech-Software Sector ETF hit its highest level since January before paring gains, while Workday , ServiceNow and ‌Salesforce rose between 1.4% and 2.4%. Cybersecurity firms CrowdStrike, Okta, SailPoint and Zscaler gained between 1% and 2.6%. The Amplify Cybersecurity ‌ETF touched an all-time high and was last up 0.6%.

The gains hint at a possible shift in investor sentiment as markets reassess software stocks following a painful valuation reset. "We continue to see some very attractive investments in software for those investors who can afford to ⁠be somewhat ​patient," said Gregg Moskowitz, senior enterprise ⁠software analyst at Mizuho.

A sustained rebound would suggest that markets are becoming more selective, distinguishing between companies genuinely at risk of being ⁠disrupted by AI and those that could ultimately benefit through higher productivity, new products and stronger customer demand. The divergence was on display ​on Monday, with analysts at BofA Global Research giving ServiceNow a "buy" rating, while reinstating Salesforce with an "underperform."

ServiceNow is "difficult ⁠to challenge" because it is "too entrenched" in large enterprise workflows, they said. Salesforce, however, faces what the analysts called "a structural shift that permanently impairs ⁠Salesforce's ​business model." "The market is drawing a clear line between companies that rely heavily on traditional per-seat subscriptions and those positioned closer to the center of the AI buildout," said Anthony Saglimbene, chief market strategist at Ameriprise Financial. Still, the ⁠rally may need to extend further to convince skeptics. Investors are likely to demand clearer evidence that software companies can ⁠defend their profit margins ⁠and business models from the competitive threat posed by AI.

The iShares Expanded Tech-Software Sector ETF has lost 12.2% so far this year as of Monday's close. The S&P ‌500 software and services ‌index is also down 13.7%.