Software stocks are staging a comeback in the second half of the year, according to Jefferies analysts, who pointed to strong results from ServiceNow Inc (NYSE:NOW, XETRA:4S0), SAP, Roper Technologies, Atlassian (NASDAQ:TEAM) and Cloudflare as evidence the sector is shaking off fears of AI-driven disruption.

Solid earnings beats, healthy margins and early signs of AI monetization through consumption growth and product up-tiering are easing investor concerns about software companies' long-term value, the analysts said.

Since an April 10 low, the iShares Expanded Tech-Software ETF has outperformed the VanEck Semiconductor ETF by four percentage points.

Jefferies analysts said the rally is highly selective. Atlassian (NASDAQ:TEAM) shares have surged more than 160% since the April low, while HubSpot has gained less than 10% over the same period. Demand continues to outpace supply, with power, labor and permitting now the primary bottlenecks rather than chip availability. National data center vacancy sits below 1.4%, and under 1% in Northern Virginia, with the buildout expected to run more than three years, the analysts said, adding they see no sign of a bubble forming.

Transformers and gas turbines now carry lead times of four to five years, with suppliers largely sold out through 2030 and 2031, the expert said, while utilities increasingly require data center operators to bring their own power. Skilled labor is also thinning and project cancellations are rising, adding further strain to permitting timelines.

The analysts said elevated capital expenditure across Microsoft, Amazon, Google and Meta should persist as a result.

Jefferies analysts also addressed recent leadership changes at Google parent Alphabet Inc (NASDAQ:GOOG), after Jeff Dean said on August 5 he would leave the company alongside several senior researchers to launch an AI startup called Discovery Loop. Demis Hassabis moved from his role as CEO of DeepMind to Chief Scientist at Google, with Koray Kavukcuoglu taking over leadership of DeepMind.

The analysts said the changes do not alter Google's AI trajectory, arguing the company's competitive advantage rests on its data assets, vertically integrated AI platform and global distribution rather than any individual researcher. Jefferies said its thesis remains that AI represents an infrastructure and monetization race, and that Google's scale, accelerating Gemini adoption, Cloud profitability and continued AI investment position it to remain a long-term winner.