Software stocks haven't had it easy, and that likely won't change until the firms finish adapting to the artificial intelligence future regardless of the financial risks, say analysts at Stifel.

Software stocks have been on a wild roller coaster this year as Wall Street evaluates the risk AI brings to the sector.

On Monday, the iShares Expanded Tech-Software Sector ETF closed up at $94.79 after rising for six trading days in a row. This rise came after Guggenheim analyst John DiFucci wrote on July 1 that it was time for investors to take advantage of the deep software sector selloff despite ongoing AI concerns. He upgraded shares of ServiceNow, Salesforce, and Check Point Software Technologies to Buy that day.

But the sector was down again on Wednesday, with the IGV falling 3% to $91.27. The ETF has now dropped 13% this year and was on pace for its worst full year since 2022 when it fell 26%.

It's fair to assume this volatility isn't going away anytime soon. One reason for this is because software companies need to go through major changes for them to change to the AI world as companies like Anthropic and OpenAI continue to roll out more advanced models.

"It is now very clear that the software we've known for 20 years is not going to be fine, unless it adapts," analysts at Stifel wrote.

Change can be a scary thing, especially when it impacts a company's financials. Stifel says software investors should expect margin pressures ahead as companies evolve with the changing times.

"Once upon a time, gross margins in SaaS were the epitome of the best business model in Tech," the analysts wrote. "Now, some of the finest companies themselves ( ServiceNow the most surprising example) are proactively talking down margins as they acknowledge the need to incorporate either third-party AI capabilities, or the prospects of home-rolling their own."

Software firms can survive, though, Stifel said. One way is through changing their pricing from per-seat models -- charging per customer -- to consumption based models, or charging for usage.

"The likes of Salesforce.com, HubSpot and ServiceNow have great opportunities with great installed bases and great distribution structures to breathe life back into the growth thesis," the analysts said. "This won't happen overnight, and it won't happen without a fair bit of choppiness, but we can see the prospects for it."

Write to Angela Palumbo at angela.palumbo@dowjones.com

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July 08, 2026 14:01 ET (18:01 GMT)

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