Jefferies analysts are advising investors to remain cautious on the software sector heading into 2026, arguing that growth is likely to continue lagging other technology segments even as artificial intelligence adoption expands across enterprises.
The analysts recommend that investors stay underweight software as overall growth decelerates and trails faster-moving areas such as semiconductors.
“We believe 2026 will be another year of gradual AI monetization,” the analysts wrote, adding that more meaningful acceleration will be needed to ease concerns around AI-driven disintermediation within the sector.
Jefferies wrote that the slow pace of monetization means selectivity will remain critical for investors. While confidence remains that long-term value will accrue to the software layer, the firm cautioned that patience is likely required.
“While we remain confident that value will ultimately accrue to the software layer, investors may need to stay patient,” the analysts wrote.
With sector valuations back near historical averages, Jefferies sees scope for multiple expansion once AI-related revenues begin to lift growth more visibly.
From a subsector perspective, the firm said it prefers software infrastructure names over applications in the first half of 2026. However, Jefferies pushed back against the broadly negative sentiment toward application software, arguing that it is not fully supported by fundamentals.
The analysts expect application sentiment to improve in the second half of the year as growth stabilizes and AI use cases become clearer.
Reflecting this view, Jefferies upgraded International Business Machines Corp (NYSE:IBM) to ‘Buy’ and downgraded Adobe Inc (NASDAQ:ADBE) to ‘Hold.’ The analysts see IBM is positioned to “reboot” software growth in 2026, while Adobe lacks a clear AI-driven inflection and near-term catalysts.
Jefferies’ top software picks for 2026 span multiple market capitalizations. Mega-cap favorites include Microsoft Corp (NASDAQ:MSFT) and Meta Platforms Inc (NASDAQ:META, XETRA:FB2A, SIX:FB), while large-cap picks are Intuit Inc (NASDAQ:INTU, XETRA:ITU), Atlassian (NASDAQ:TEAM), and Oracle Corp (NYSE:ORCL, XETRA:ORC). Mid-cap selections include Procore, Unity Software Inc (NYSE:U), and Wix, and the firm’s small-cap pick is Upwork.
Among its “Sweet 16” predictions for 2026, Jefferies expects OpenAI to make a larger impact in the enterprise market, a development the analysts said tactically favors Microsoft and Oracle. Microsoft is expected to see “the broadest AI tailwinds in 2026,” driven by a strong backlog and capacity expansion, while Meta is forecast to benefit from a broad-based AI-driven advertising resurgence that could support a rerating of the stock.
The firm also anticipates a rebound in Amazon.com Inc (NASDAQ:AMZN) shares after modest gains in 2025, as AWS growth accelerates on renewed AI efforts.
Alphabet Inc (NASDAQ:GOOG) is expected to see more normalized returns following a strong 2025, though Jefferies said AI should continue to support longer-term gains.
In application software, Jefferies sees improving sentiment later in 2026, with Intuit, Procore, and Salesforce Inc (NYSE:CRM, XETRA:FOO) highlighted as top picks.
Atlassian is expected to benefit from cloud reacceleration and AI-driven expansion beyond developers, while Unity is viewed as having continued upside following strong performance in 2025.
Not all names are favored by the firm. Jefferies cautioned that Palantir Technologies Inc (NYSE:PLTR)’s valuation has moved well ahead of fundamentals, and said Adobe lacks an identifiable AI inflection. By contrast, the firm said it remains constructive on Snowflake Inc (NYSE:SNOW), forecasting a strong year in the AI data cloud market.