U.S. software stocks stage a comeback, posting their best monthly performance since 2001

Strong earnings reports from Snowflake and Okta have boosted market sentiment, loosening the extremely pessimistic expectations about AI disrupting the software industry.

Snowflake and Okta each posted earnings that exceeded expectations, driving a significant rebound in U.S. software stocks this week and lifting the iShares Expanded Tech-Software ETF (IGV) to a 21% cumulative gain in May, marking its strongest monthly performance since October 2001. The previously prevalent "SaaSpocalypse" narrative—the belief that AI would fully replace the Software-as-a-Service sector—has been notably alleviated, at least for now.

Snowflake recorded its best single-day gain ever this Thursday, surging nearly 50% over the four trading days following the Monday holiday; identity security firm Okta also soared 30% in a single day on Friday, also setting a new record. The results from both companies indicate that Wall Street’s assessment of AI’s impact on the software industry may have been overly pessimistic—some businesses are showing greater resilience than expected.

Against the backdrop of this rally, IGV’s year-to-date loss has narrowed to 3.8%, but it still significantly lags the Nasdaq Composite’s 18% gain for the same period, indicating that structural pressure in the software sector has not fully dissipated.

Snowflake is the primary catalyst behind this week’s software stock rebound. The company announced a $6 billion cloud computing and chip partnership with Amazon and raised its full-year guidance, signaling that enterprise clients are accelerating their migration to AI workloads.

"We are also seeing customers deploying and scaling workloads at an increasingly rapid pace," CEO Sridhar Ramaswamy told analysts on the earnings call.

Argus Research analysts labeled Snowflake as a “pick-and-shovel” player in the generative AI wave and raised their price target from $250 to $300. In their post-earnings report, they wrote: "As enterprises increasingly need to unify and integrate data—Snowflake’s core business—to fully leverage generative AI, we believe Snowflake could in fact be a major beneficiary of GenAI development." Snowflake shares closed Friday at $255.55, up 17% so far this year.

Okta’s strong performance was equally surprising to the market. The company not only delivered quarterly results that beat expectations but also sent investors a key message: the transition toward agentic AI is forcing companies to ramp up their investment in identity security, in order to counter the growing threat of an automated “zombie army.”

"It will take time for AI products to roll out, but every organization will build and deploy intelligent agents," Okta CEO Todd McKinnon told CNBC. "This will be foundational infrastructure that every company will have to have in the coming years."

This narrative helped Okta reverse previous concerns that identity management software would be eroded by AI, with shares soaring 30% in a single day on Friday.

The software sector’s rebound is not limited to Snowflake and Okta. Atlassian gained 26% this week, ServiceNow rallied over 20%, and Shopify, Workday, and Asana each saw gains of at least 14%.

Among software giants with exposure to cloud infrastructure, Oracle rose 16% this week and Microsoft gained nearly 8%—yet Microsoft is still down almost 7% year-to-date, making it the worst-performing tech giant so far this year.

It’s worth noting that the historical reference for this rally is not entirely optimistic: IGV also staged a strong monthly comeback in October 2001, but it was merely a brief respite during the bursting of the dot-com bubble. Whether software stocks can truly stabilize now still depends on the evolving dynamics between AI disruption and enterprise IT spending. The “SaaSpocalypse” narrative may not be over yet, but it has at least taken a back seat for now.