JPM sees software rally extending, favors Microsoft, ServiceNow, Snowflake

Software stocks are likely to extend their recent rally as third-quarter earnings provide evidence that AI demand is supporting infrastructure software while easing concerns about disruption to application software, according to JPMorgan.

The software industry has recovered sharply since the end of June, taking the six months gains of IGV software index (IGV) to 36%, compared with a 15% gain for the S&P 500 (SP500).

JPMorgan favors Microsoft (MSFT), ServiceNow (NOW), Snowflake (SNOW), and Cloudflare (NET) heading into earnings.

"We expect the broader recovery in the software sector index to continue with upsides to Application Software company share prices more likely to be driven by re-rating of valuation multiples as fundamentals prove to be more resilient than priced in by low investor expectations on account of AI disruption threats," analyst Samik Chatterjee said.

"For Infrastructure software companies we expect share prices upsides to be driven by positive estimate revisions helped by AI-led secular tailwinds to revenue despite the backdrop of rich valuation multiples."

For Microsoft, JPMorgan expects continued strong adoption of its Copilot AI products, although it said monetization of those users is likely to build gradually. ServiceNow could benefit from continued strong business momentum and higher expectations for AI-related revenue.

JPMorgan expects Snowflake to benefit from an acceleration in customer migrations and AI-related revenue, while Cloudflare could see revenue growth accelerate into the high-30% range, supported by demand for security and network performance from AI-focused companies.

JPMorgan downgraded HubSpot (HUBS) to Neutral from Overweight, citing uncertainty around the timing of a recovery in revenue growth. It said slower-than-expected AI monetization, longer customer buying cycles, and uncertainty over the return on AI investments could weigh on growth into 2027.