JPMorgan Bullish on Software Sector Rebound, Top Picks Include Microsoft, ServiceNow, and Snowflake
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JPMorgan sees the software rally extending, with IGV up 36% in six months — more than double the S&P 500's gain; the bank's top picks ahead of earnings are Microsoft, ServiceNow, Snowflake, and Cloudflare, while HubSpot gets a downgrade to neutral.
Why does JPMorgan think software can keep climbing?
The core thesis: Q3 earnings will show AI demand is materially supporting infrastructure software, while fears of AI disrupting application software are overpriced.
The numbers: since late June, the iShares software ETF (IGV) has risen roughly 36%, versus about 15% for the S&P 500. This means → software is outpacing the broad market by more than two to one — capital is front-running the AI tailwind.
Analyst Samik Chatterjee argues application software upside will come mainly from multiple re-rating — the market's AI-disruption fears set expectations too low, and fundamentals will prove more resilient than feared.
Infrastructure vs. application software — what's driving each?
Infrastructure software: upside is earnings-revision driven, backed by AI's long-term structural revenue tailwind — but current multiples are already rich. In plain terms = high earnings certainty, yet the stock price partly reflects it; gains come from delivery, not discovery.
Application software: upside is mostly about multiple repair. This means → the market was too pessimistic; as long as fundamentals hold, valuation recovery alone can push shares higher.
This reflects JPMorgan's split stance: for infrastructure names, watch earnings delivery; for application names, watch the expectation gap closing.
What makes each of the four top picks stand out?
Microsoft (MSFT): Copilot AI adoption remains strong, though JPMorgan notes that monetizing those users will likely be gradual — not an overnight revenue surge.
ServiceNow (NOW): sustained business momentum plus rising AI-related revenue expectations. Put simply = the legacy business holds the floor while AI adds a new growth layer.
Snowflake (SNOW): accelerating customer migration and AI-related revenue are the key catalysts. Cloudflare (NET): revenue growth is expected to accelerate toward the high-30% range, driven by AI companies' demand for security and network performance.
Why did HubSpot get downgraded?
JPMorgan cut HubSpot (HUBS) from overweight to neutral, citing uncertainty around when revenue growth will reaccelerate.
Three headwinds: AI monetization is slower than expected, customer procurement cycles are lengthening, and AI return on investment remains unclear — all of which could weigh on 2027 growth.
This signals a broader point: even while bullish on the sector overall, JPMorgan is drawing a line between stocks with confirmed AI tailwinds and those where the benefit remains uncertain — not a blanket buy call.
What is the key test for this re-rating thesis?
The entire thesis hinges on Q3 earnings as the proof-point window: does AI demand actually translate into revenue and profit growth for software companies?
This means → if earnings confirm that AI's support for software fundamentals is real, the re-rating logic strengthens; if not, the current 36% rally risks giving back gains.
In plain terms = the market is trading on expectations right now; Q3 earnings need to deliver evidence — evidence arrives, the rally extends; evidence falls short, the run-up was borrowed from the future.
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