Insights
Rerating Software After the AI Crash: The Recovery Private Founders Missed
Key takeaways
- The February AI dump hit every tier of software; the recovery since then has been underreported, especially outside the mega-caps.
- Small-cap application software is up 18% for the year against 13% for the S&P 500, with mid-cap application software back above par.
- Buyers are discriminating again, paying premiums when they find what they want (Workday rumor day, Publicis-LiveRamp) rather than pricing software as one category.
- If your sense of what a company your size is worth was set at the June low, it is out of date.
Everyone knows that AI killed software. The recovery says otherwise.
01 The claim
AI killed software. That much everyone knows: the S&P 500 software and services index shed about $1 trillion in one week of February, and the obituaries followed. The reality is different, and the recovery has been vastly underreported.
The market did not sort. It dumped the entire software universe in fear, every tier of it. Then the money came back in force: small-cap application software is up 18% for the year against 13% for the S&P 500, mid-cap is above par, and the fifteen largest have recovered most of what they lost.
Dumped in fear, bought back in force. The market and software by company size · change from 31 December 2025, % · orange = at the 2026 low · blue = 3 September 2026. Source: S&P Dow Jones Indices, sub-industry indices by size tier; closes via Google Finance, indexed to 31 December 2025.
02 Why it is true
Systems software — the layer applications run on, and what AI needs more of — is back, sitting close to the market’s gain for the year. Application software is what founders build: the programs people use to do a job, the software AI was supposed to replace. It is not merely back. Outside the fifteen largest names it is beating the market. The reason is simple: the money that returned looked at what these companies actually do and concluded that most of it is not readily replaceable.
Buyers are discriminating, and paying up when they find what they want. On 13 August, Silver Lake was reported in talks for Workday; the shares rose nearly 18% on the report alone, their best day in a decade. In May, Publicis agreed to acquire LiveRamp — a small-cap application-software company — for cash at a 30% premium.
03 What it means for private companies
The software discount was a large-cap story, and for companies your size it is over. Buyers never priced the category; they price the company, and they are paying premiums for the ones they want. If your sense of what your company is worth was set in June, it is out of date.
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