Months of panic that AI would replace subscription software are easing after a strong week of software earnings

Salesforce and Workday both showed promising AI momentum in their second-quarter earnings reports this week.

For the past year, most software stocks have been weighed down by fears of artificial-intelligence displacement.

As employees became more productive with AI tools, the thinking went, enterprises would trim their staffs and purchase fewer software subscriptions, also known as "seats." The rise of vibe coding, meanwhile, would make building custom software radically cheaper and easier. These prevailing beliefs on Wall Street led to the sentiment that AI was eating software.

However, cracks are appearing in the doom-and-gloom software thesis, leading some to wonder if the worst of the selling is over. This week, the iShares Expanded Tech-Software Sector ETF IGV broke into positive territory on a year-to-date basis, powered by a particularly strong earnings beat from software bellwether Salesforce (CRM) after Wednesday's closing bell.

The company showed acceleration in its future sales pipeline, with current remaining performance obligations increasing 14% from a year before. Net new annual order value reached the highest level in four years. In turn, Salesforce's stock soared 22.6% on Thursday after the results.

"Our seats were supposed to decline. Instead, Agentforce sales, service and Slack all saw year-over-year growth," Salesforce CEO Marc Benioff shared on the earnings call.

Salesforce's recent report answered the company's "existential question," according to Michael Monaghan, partner and portfolio manager at Founder ETFs. It's not just that Salesforce isn't losing seats; the company is also seeing increasing upgrades to premium bundles as customers demand access to the most advanced technology.

"We're not surprised by any of this," Monaghan told MarketWatch. Even during the height of the software selloff back in March, he was confident that the sector would see an AI-powered comeback in the following months.

"You could tell back in March that these companies were going to have incredible back-half earnings. This Salesforce print is probably one of the first validations of that," Monaghan said. "The concept that AI was going to vibe-code away packaged software ... probably wasn't viable."

Also: Workday's stock sees a record surge. Could a buyout spark a software revival?

Shares of Workday (WDAY) rose 5.8% on Friday after the company posted stronger-than-expected subscription revenue for its latest quarter. Management also disclosed that Workday was nearing $600 million in annual recurring revenue from its agentic AI offerings, up from $500 million the previous quarter.

Other software stocks such as CrowdStrike Holdings (CRWD) and ServiceNow (NOW) also surged this week. CrowdStrike recorded its "best quarter in history" as AI cybersecurity threats drove demand for its Falcon platform. ServiceNow, similar to Salesforce, has increasingly been viewed as authoritative repository of customer data that's difficult for AI to replicate.

While some companies may be displaced by frontier labs, "I don't think all SaaS companies are created equal," Nicholas Frasse, product manager for thematic ETFs at VanEck, told MarketWatch. "There are entrenched businesses like Salesforce that own a very proprietary set of data that make them much more formidable in this new era, and also probably a much bigger benefactor of the technology."

Software names have experienced relief rallies in the past few months, but those gains largely came when steep selloffs in chip stocks led investors to rotate into the software sector instead. This recent rally could have more staying power, some experts believe.

"Investors and the market have started to find the signal through the noise," Frasse said. "You're starting to see much more nuanced activity around individual names depending on the individual business model, rather than systemic buying or selling of an entire category."

However, key investor questions or debates at present still center on how long "the epic rush into software" could last before market positioning normalizes or buying momentum stalls, Mizuho desk-based analyst Jordan Klein wrote in a Friday note.

This latest rally in software has much more to do with "positioning" among institutional investors than anything particularly new in the core fundamentals, Klein said.

According to Klein, a lot of hedge funds and long-only growth managers have owned less software in their portfolios relative to the sector's representation in the broader market - partly owing to threats from AI, but also because the sector became a "funding short" to enable larger bullish positions across semiconductors and AI hardware.

Based on this "underweight" positioning across the investment community, Klein believes software names could continue to climb higher well into September and October. The analyst expects shares of Salesforce to charge higher into its Dreamforce conference next month, but cautioned that he wouldn't "chase" the stock at current prices - instead preferring plays like ServiceNow and Microsoft (MSFT).

-Christine Ji