Barclays forecasts a turnaround for software stocks in 2026, driven by AI revenue growth and improved investor sentiment. The sector struggled in 2025, with software stocks lagging the broader market, rising only 6% compared to a 16% gain for the S&P 500. Investors have been cautious, worried about AI integration challenges and potential overbuilding among infrastructure providers.

Barclays anticipates these concerns will ease in 2026. For application software, easier comparisons and improved AI adoption should boost growth. Established vendors are expected to regain favor as new entrants face clearer challenges in distribution and compliance. Oracle, Salesforce, and DigitalOcean are among Barclays' top picks for 2026, while Snowflake was downgraded due to tougher competition and DataDog was cut to Equal Weight because of challenging comparisons.

The report suggests that large performance obligations from 2025 will convert into revenue in 2026, making AI demand more tangible. This, combined with continued large funding rounds for model developers, should reduce concerns around counterparty risk. A more active M&A environment, driven by higher free cash flow and activist investor pressure, is also expected, with large platforms using cash to enhance AI capabilities and smaller companies becoming potential takeover targets.