Software Stocks Roared Back Last Quarter, and Cramer Says the Rally Isn't Over

The iShares Expanded Tech-Software Sector ETF (IGV) rose 17% in the third quarter, which ended Wednesday, while the iShares Semiconductor ETF (SOXX) fell 11% — a reversal that CNBC's Jim Cramer called the defining stock market story of the period.

The major averages posted only modest gains in the quarter, but the moves beneath the surface were dramatic. Market leadership shifted: software stocks recovered from their artificial-intelligence-driven selloff, while chip names cooled after a massive first-half run.

"Ultimately, I think we'll remember the third quarter as the moment when software bounced back and some amazing data center plays succumbed to profit taking," the "Mad Money" host said Thursday.

The shift matters beyond the trading floor. For most of the past year, investors treated generative AI as a threat to enterprise software vendors, on the theory that AI agents would render their products obsolete. The quarter's repricing suggests the market now sees AI as a growth driver for incumbents rather than a disruptor.

Salesforce led the way with an Anthropic tie-in

Salesforce rallied 46% during the quarter. Investors grew more confident that AI could fuel growth rather than threaten its business. The company unveiled Claudeforce, which includes a plugin that lets customers use Anthropic's Claude to access data stored in Salesforce and perform tasks such as drafting emails and updating records.

Salesforce also delivered a strong quarter and took advantage of its lower share price to buy back stock. Cramer said the shares can still go higher.

He is similarly bullish on Microsoft, which gained 37% during the quarter.

"Microsoft's rally is just beginning," Cramer said, pointing to strong demand for Copilot, accelerating growth at Azure and signs that its data center investments are beginning to generate returns.

Workday and Veeva also rallied, gaining 55% and 60% respectively, as fears of AI disruption eased. Cybersecurity remained another bright spot: CrowdStrike gained 39% as increasingly powerful AI reinforced the importance of protecting companies from new threats.

Data center winners cooled off

Meanwhile, some previous data center winners pulled back sharply. Corning fell nearly 40% after a massive run. Cramer characterized the decline as profit-taking and said he would "happily buy this one back if it dips again."

Caterpillar dropped 24%, a decline he said could present an opportunity, because its engines are becoming a growing source of data center power.

The pattern tells a story about how AI investment dollars are moving. Money that crowded into the hardware and infrastructure layer of the AI buildout in the first half is now rotating toward the application layer — the software companies that stand to monetize AI through existing enterprise customer relationships.

Interest rates, not AI, are Cramer's biggest worry

Heading into the new quarter, Cramer's biggest concern is whether the Federal Reserve will continue raising interest rates. The Fed raised its benchmark rate by a quarter percentage point in September, putting pressure on rate-sensitive stocks such as Home Depot.

"My big fear right now is the impact of higher interest rates on the stock market," Cramer said. He added that the upcoming earnings season should provide a clearer picture of how higher borrowing costs are affecting companies.

Cramer's Charitable Trust, the portfolio run by CNBC's Investing Club, owns shares of Salesforce (CRM), Microsoft (MSFT) and CrowdStrike (CRWD) — a disclosure readers should weigh when evaluating his recommendations.

The next test arrives with earnings season. If software vendors can show AI features like Claudeforce and Copilot converting into revenue, the third quarter's rotation may prove to be the start of a longer software recovery rather than a one-quarter bounce.