Software stocks rallied sharply in afternoon trading, with Health Catalyst leading the charge with a 12.4% jump. The broader sector has been on a tear, with the software ETF (IGV) outperforming the NASDAQ by 9% over the past week. This marks a reversal from a period where software stocks had lagged the broader market.

Morgan Stanley analysts attribute the rally to investors shifting focus from general AI hype to companies offering practical, secure business solutions. Enterprise AI adoption is now concentrated in targeted applications like software development and information retrieval, signaling a more mature investment phase. The market's overreaction to news has created buying opportunities in quality stocks.

Among the gainers, AppLovin rose 9%, PubMatic gained 5.4%, and Pegasystems climbed 5.9%. Health Catalyst's shares have been extremely volatile, with 50 moves exceeding 5% in the past year. Despite today's surge, the company remains down 14.3% year-to-date and trades 57.5% below its 52-week high of $4.60. Investors who bought $1,000 of Health Catalyst shares five years ago would now hold just $41.62 worth of stock.