Software Sector Roars Back as Investors Flee Chip Stocks

July saw a significant shift in investor sentiment as they rotated out of high-flying chip stocks and into software names, which staged a strong rebound. The iShares Expanded Tech-Software Sector ETF (IGV), heavily weighted towards software stocks, rose 4.4% last month after a 10.7% drop in June.

Workday emerged as the top software gainer in July with a 31% rise following a 16.3% drop in the prior month. Adobe rose 22.1%, Intuit rose 21.6%, Autodesk rose 20.4%, and Salesforce rose 17.5%, while Microsoft rose 24.6%. This turnaround marked a sharp reversal for the software sector, which had been under pressure amid concerns that new AI launches would erode demand for certain niche software products.

The biggest technology companies reported strong quarterly results, lifting sentiment across the broader tech sector. Cloud platforms such as Amazon Web Services, Microsoft Azure, and Google Cloud saw accelerating growth, with cloud revenue widely viewed as a proxy for enterprise software spending. Google Cloud posted an 82% sales growth in its latest quarter.

According to Stocktwits, retail sentiment was 'bullish' for Workday (WDAY), 'neutral' for Autodesk (ADSK), Adobe (ADBE), and Intuit (INTU), 'bearish' for Salesforce (CRM), and 'extremely bullish' for Microsoft (MSFT). Based on forward earnings, Microsoft is the most richly valued stock at 24.2 times forward earnings, while Adobe is the cheapest at 9.7 times.