Jefferies analysts are advising investors to remain cautious in the software sector heading into 2026, arguing that growth is likely to lag other technology segments even as artificial intelligence adoption expands within enterprises.
The analysts recommend investors remain underweight on software as overall growth slows and follows faster-moving sectors such as semiconductors.
“We believe 2026 will be another year of gradual monetization of AI,” the analysts wrote, adding that a more meaningful acceleration will be needed to address concerns around AI-driven disintermediation within the sector.
Jefferies wrote that the slow pace of monetization means selectivity will remain key for investors. While confidence remains that there will be long-term value to the software layer, the company cautioned that patience is likely required.
“While we remain confident that value will ultimately flow into the software layer, investors may need to remain patient,” the analysts wrote.
With sector valuations back near historical averages, Jefferies sees room for multiple expansion once AI-related revenues start to more visibly drive growth.
From a subsector perspective, the company said it will prefer software infrastructure names over applications in the first half of 2026. However, Jefferies pushed back against the overwhelmingly negative sentiment towards 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.
In line with this view, Jefferies International Business has upgraded Machines Corp (NYSE:IBM) to ‘Buy’ and downgraded Adobe Inc (NASDAQ:ADBE) to ‘Hold’. The analysts see IBM positioned to restart software growth in 2026, while Adobe lacks a clear AI-driven turnaround and near-term catalysts.
Jefferies’ top software picks for 2026 span multiple market caps. Mega-cap favorites include Microsoft Corp (NASDAQ:MSFT) and Meta Platforms Inc (NASDAQ:META, XETRA:FB2A, SIX:FB), while large-cap picks include Intuit Inc (NASDAQ:INTU, Mid-cap picks include Procore, Unity Software Inc (NYSE:U) and Wix, and the company’s small-cap pick is Upwork.
Among its ‘Sweet 16’ predictions for 2026, Jefferies expects OpenAI to have a greater impact on the enterprise market, a development that the analysts say tactically favors Microsoft and Oracle. Microsoft is expected to see “the broadest AI tailwinds” in 2026, driven by strong backlog and capacity expansion, while Meta is expected to benefit from a broad AI-driven advertising revival that could support a stock revaluation.
The company also expects shares of Amazon.com Inc (NASDAQ:AMZN) to rebound after modest gains in 2025 as AWS’s growth accelerates thanks to renewed AI efforts.
Alphabet Inc (NASDAQ:GOOG) is expected to post stronger normalized returns after a strong 2025, although Jefferies said AI should continue to support longer-term earnings.
In application software, Jefferies sees sentiment improving later in 2026, with Intuit, Procore and Salesforce Inc (NYSE:CRM, XETRA:FOO) listed as top picks.
Atlassian is expected to benefit from cloud re-acceleration and AI-driven expansion beyond developers, while Unity is expected to continue rising after strong performance in 2025.
Not all names are company favorites. Jefferies warned that Palantir Technologies Inc (NYSE:PLTR)’s valuation is well above fundamentals, and said Adobe lacks an identifiable AI inflection. In contrast, the company says it remains constructive on Snowflake Inc (NYSE:SNOW), which predicts a strong year in the AI data cloud market.
