Software and cybersecurity stocks are now outpacing chipmakers. Investors are moving away from AI hardware and betting on security and practical software, with the iShares Expanded Tech-Software ETF up 15% this quarter while semiconductor funds drop.
Chipmakers led the market for months, riding the AI boom. Now, software and cybersecurity stocks are taking over. The iShares Expanded Tech-Software Sector ETF has jumped 15% this quarter. At the same time, the VanEck Semiconductor ETF has fallen 14%. Investors are shifting their bets. They want companies that deliver real software solutions and security, not just the chips that run AI models.
Earlier in 2026, semiconductor stocks soared. Nvidia and other chip makers supplied the hardware for fast AI growth. Software companies lagged. Many investors worried that AI tools could make traditional software less important. But now, concerns about how fast AI is moving and whether security is keeping up have changed the mood. The market is looking hard at software and cybersecurity firms. A Reuters financial review found that worries about a slowdown in AI spending have hit semiconductor stocks and sped up the move into software.
On September 18, European AI companies such as Mistral publicly rejected calls to slow AI development, arguing that such measures could entrench the dominance of American tech giants.
Security concerns push software to the front
Demand for cybersecurity has surged in recent months. Companies like CrowdStrike, Cloudflare, and ZScaler have posted strong returns. The reason is clear. As AI systems spread, the risks of data leaks, misuse, and system flaws grow. Businesses are spending more on software to keep their operations safe and protect sensitive data.
This focus on security is not just a short-term trend. Some top AI executives have called for slowing down AI development so security can catch up. That view has helped push money back into software stocks, which had been left behind during the first AI hardware rush. Now, the market is rewarding companies that offer real, defensible value instead of just AI hype. In mid-September, Mark Zuckerberg said AI labs already have enough reasons to build safely. He stressed that each lab should move at a pace that keeps model training safe, according to Reuters.
Amazon has taken a public stance that AI models should only be released after rigorous testing and with strong safeguards in place, but the company does not support an industry-wide slowdown in AI development.
ETF numbers show the shift
The change between software and semiconductor ETFs is sharp. By the end of June, the iShares Expanded Tech-Software ETF was down more than 14% for the year. The VanEck Semiconductor ETF had gained over 80%. But this quarter, those numbers have flipped. This matches what Reuters technology coverage has reported, as the debate over fast AI progress versus stronger safety rules heats up.
Investors are now looking for companies that can use the AI infrastructure already built, not just those selling the next round of hardware. The iShares Expanded Tech-Software ETF, which holds a wide mix of software and cybersecurity stocks, is set to benefit if this trend keeps going. For investors, the AI trade is no longer just about chips and data centers. It is about the software that makes those systems work and keeps them safe.
What slower AI growth means for software
The idea of slowing down AI development has changed the story for software firms. Before, many feared that AI would make much of their work outdated. Now, there is a clear need for strong, secure software to use AI safely. This has made software stocks, especially those focused on security and business tools, more attractive.
The U.S. cybersecurity market keeps growing. Industry research shows spending on security products and services topped $70 billion in 2025. As AI use spreads, the need for advanced software to manage, monitor, and secure these systems is likely to stay high. Past results do not guarantee future gains, but the current shift shows investors are rethinking their risks and expectations.
Knowing how sector rotation works is key for anyone investing in tech. Sector rotation means money moves from one industry group to another as the market, economy, or investor focus changes. In AI, the first rush was for hardware and chips to meet the need for computing power. Now that the basics are in place and security worries are rising, money is moving into software and cybersecurity. These areas are now seen as essential for the next phase of AI in business and daily life. This shift shows why it is risky to chase last quarter's winners without watching how the fundamentals are changing.
