US software stocks have been on a tear over the past month, with investors betting that these previously beaten-down shares have finally found their footing. However, the wave of earnings reports due this week will serve as the ultimate test of whether this rebound has staying power.

Since hitting a recent low on July 23, the iShares Expanded Tech-Software Sector ETF (IGV.US) has surged 18%, significantly outpacing the tech-heavy Nasdaq 100 index and the so-called "Magnificent Seven." During that same stretch, the software and services segment emerged as the top-performing sector within the S&P 500, rocketing 24% higher while the benchmark index managed just a 3.3% gain.

But before that July 23 bottom, the sector had been the third-worst performer in the S&P 500 this year, plunging as much as 22% amid widespread pessimism about the prospects for software developers in an AI-dominated landscape.

This week brings a gauntlet of earnings from key software names, including several viewed as potentially vulnerable to AI disruption. After Tuesday's market close, Intuit (INTU.US) will kick things off, followed by Salesforce (CRM.US) and CrowdStrike (CRWD.US) on Wednesday, with Autodesk (ADSK.US) and Workday (WDAY.US) rounding out the schedule on Thursday.

Greg Martin, co-founder and managing director at Rainmaker Securities, noted: "The results give investors a close-up look at whether AI is truly disrupting these businesses. So far, there doesn't appear to be any sign of growth deceleration or margin compression."

Sentiment is clearly warming, with no evidence yet that AI is eroding the sector's growth prospects. At the same time, a growing number of investors are gravitating toward software's relatively cheap valuations, particularly given the potential for many companies to become acquisition targets. For instance, reports have surfaced that private equity firm Silver Lake is in talks to acquire Workday. While the deal hasn't been confirmed, the mere speculation has been interpreted as a bullish signal.

Martin added: "If a savvy buyer like Silver Lake is showing interest, it suggests the worst-case disruption scenario isn't materializing."

This rally has even upended a popular hedge strategy that dominated markets this year: going long chip stocks (the biggest beneficiaries of massive AI spending) while shorting software stocks (seen as vulnerable to AI). Over the past month, that trend has reversed—since the July 23 low, the S&P North American Expanded Technology Software Index has jumped 19%, while the Philadelphia Semiconductor Index has fallen 4.9% over the same period.

Data compiled from the current earnings season shows stellar results across the board. All 13 software companies in the S&P 500 that have reported so far have beaten expectations, with an average surprise of 10%, and only one missed on revenue.

Morgan Stanley analyst George Weber wrote in an August 20 note: "The AI disruption risk hasn't disappeared, but the resilience of earnings into the first half of 2026, an increasingly diversified foundation model ecosystem, and the gradual AI monetization emerging in fiscal 2027 provide a more favorable backdrop for being bullish on this space."

For example, Microsoft (MSFT.US) reported its fastest cloud growth in four years on July 30, sending shares to their biggest single-day gain since October 2008. Palantir Technologies (PLTR.US) surged nearly 30% after its August 3 earnings release, with CEO Alex Karp attributing the strong outlook to "extraordinary" demand.

According to industry research, consensus expectations call for 15% earnings growth in 2026 for software companies, a figure that has been modestly revised upward in recent weeks. Revenue growth is projected at 14.6% this year.

With improving profitability and the S&P North American Software Index still down roughly 3% year-to-date despite the recent bounce, investors could uncover plenty of value opportunities. The index currently trades at about 27 times forward 12-month earnings, below its 10-year average of roughly 34 times.

Looking at individual components, Salesforce trades at just 14 times expected earnings, near historic lows and well below its 10-year average of 43 times. Workday's forward multiple is around 17 times, also close to the historic low hit in June and far beneath its five-year average of 36 times. Intuit commands a multiple of under 14 times, versus a 10-year average of 32 times.

Jack Ablin, chief investment strategist at Cresset Asset Management (which holds IGV), remarked: "The key question is whether this is a genuine value opportunity or a mirage. The initial harsh bearish view was certainly too extreme, but AI's ultimate impact on software remains unresolved. For now, we prefer to steer clear of these contested areas."

For the time being, M&A expectations are a major driver of the sector's enthusiasm. Data shows that US software deals have reached nearly $364 billion so far this year, up 98% from the same period last year when the M&A market was nearly frozen. Deep-pocketed private equity investors or large tech companies could step in to acquire some software firms, providing a broad lift to the entire sector.

Rainmaker's Martin concluded: "There's a massive amount of capital chasing deals in this market. The anticipation of more M&A or consolidation will put a floor under software valuations."