European software and IT services remain in recovery, but the AI shock is making the market more cautious

Overview

This report discusses the European software and IT services industry, primarily based on the semiannual survey conducted by Numeum, the French software and IT services industry association. The survey was conducted by Xerfi and covered 413 companies and CIOs, including IT service providers, software vendors, and enterprise CIOs. Bernstein believes the industry remains in recovery, but the macroeconomic environment, downward revisions to French GDP expectations, weak confidence among smaller companies, and technological uncertainty caused by AI have made the recovery weaker than previously expected.

Core views

The report's core view is that industry demand has not deteriorated to an uncontrolled degree, but market sentiment has retreated from its previous high levels of optimism. The downgrade is most pronounced in software, where the 2026 growth forecast was reduced from +8.4% to +6.2%; IT services growth is still expected to remain in the low single digits. AI is a double-edged sword for both software and IT services: on one hand, it creates demand for projects and product upgrades; on the other, it lengthens customer purchasing decisions, increases pressure on software vendors to upgrade their technology stacks, and may replace some non-core software spending. The insourcing of IT services is not directly driven by AI itself, but by rapid technological innovation and companies' desire to build internal capabilities.

Analysis framework

The report combines industry survey interpretation with top-down analysis of market growth expectations, evaluating Numeum member feedback, CIO priorities, segment-level growth forecasts for software and IT services, AI adoption pressure, and industry company valuation tables within a single framework. The focus is not on changing ratings for individual companies, but on assessing the slope of industry recovery, AI's impact on demand and margins, and whether investor sentiment has become excessively optimistic.

Methodology notes

• Industry Survey AnalysisNumeum Semiannual Survey

  Uses feedback from industry association members and CIOs to assess demand, growth expectations, and corporate priorities in software and IT services.

  The survey sample included 413 companies and CIOs, comprising 43% IT service providers, 29% software vendors, and 28% CIOs. It was conducted by Xerfi and used to produce 2026 growth forecasts by segment.

• Growth Forecast ComparisonYear-over-Year Growth Forecasts by Segment

  Compares changes in growth expectations across software, IT services, and other subsectors.

  The report focuses particularly on the reduction in the software forecast from +8.4% to +6.2% and the continued low-single-digit growth expected for IT services, using these to assess whether recovery is weaker than originally expected.

• Theme Impact AssessmentAssessment of AI's Impact on Software and IT Services

  Assesses the impact of generative AI and agentic AI on software spending, customer decision-making, technology-stack upgrades, and margins.

  The report believes AI will generate new business in the short term, but also make decision-makers more cautious and potentially replace some non-core software spending; productivity gains may not translate into margin expansion.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• European Software and IT Services Industry

  Core research subject

  Strengths

  The industry remains in recovery, with Numeum expecting growth in the second half of 2026 to exceed that in the first half; AI and system upgrades create new business opportunities.

  Weaknesses

  The recovery is weaker than previously expected, confidence among smaller companies is weak, and software growth expectations have been lowered.

  Comparison

  Compared with previously more optimistic expectations, this report emphasizes continued recovery but reduced optimism.

  Risks

  Downward revisions to macroeconomic expectations, delayed customer decisions, AI replacing some software spending, and limited margin improvement.

• Software Vendors/SaaS

  Subsector most directly affected by AI

  Strengths

  There is not yet clear evidence that existing businesses have been significantly disrupted by new entrants on a large scale, nor evidence of rising churn.

  Weaknesses

  AI adoption remains at an early stage, and monetizing new features and upgrading technology stacks require time and investment.

  Comparison

  Compared with IT services, the downgrade to software growth expectations is more pronounced.

  Risks

  Agentic AI could reduce some non-core software spending, while AI-native companies could increase competitive pressure.

• IT Service Providers

  One of the beneficiaries of industry recovery and demand for AI projects

  Strengths

  AI and technological innovation can generate demand for new projects, while upgrades to customer systems continue to support service demand.

  Weaknesses

  Smaller IT service providers face narrower customer vendor lists, shifts toward nearshore/offshore delivery, and requirements to invest in new technologies.

  Comparison

  Compared with software, IT services growth expectations are more stable but remain only in the low single digits.

  Risks

  During periods of rapid innovation, enterprises may insource some IT services to retain knowledge of new technologies.

• ATE.FP, ATO.FP, AUB.FP, CAP.FP, GIB/A.CN, IDR.SM, OVH.FP, REY.IM, SOP.FP, 74SW.FP

  Companies covered in Bernstein's ticker table

  Strengths

  The report table lists current prices, price targets, EPS, and EV/Adj EBIT valuations for relevant European software and IT services companies.

  Weaknesses

  The report makes no changes to ratings or price targets; individual company investment conclusions are not the focus of the main text.

  Comparison

  The table presents multiple companies alongside the EDME index for industry coverage and valuation reference.

  Risks

  Company-level risks should be assessed based on Bernstein's disclosure pages; the main text primarily discusses industry-level macroeconomic, AI, and demand risks.

Key data

• Survey Sample Size413 companies and CIOsThe sample comprised 43% IT service providers, 29% software vendors, and 28% CIOs.
• 2026 Software Growth Forecast+6.2%Lowered from the previous forecast of +8.4%.
• IT Services Growth ForecastLow single digitsThe report states that IT services companies are still expected to grow in the low-single-digit range.
• Share of CIOs Expecting Agentic AI to Replace Software Spending22%22% of CIOs believe agentic AI could replace or reduce some software spending, particularly in non-core business applications.
• Green IT Priority22% of CIOs listed it as a 2026 priorityGreen IT/energy efficiency ranked below cybersecurity, compliance, unavoidable cost optimization, and generative AI in importance.
• Ratings and Price TargetsUnchangedThe report explicitly states, “No changes in rating and PT.”

Impact & implications

The investment implication is that the European software and IT services sector continues to have recovery support, but investors should lower their expectations for the recovery trajectory and AI-driven margin benefits. Software vendors face pressure from AI-native competitors, longer customer decision cycles, and investment requirements to upgrade their technology stacks; IT service providers benefit from enterprise digitalization and demand for AI projects, but smaller providers may be squeezed by customer vendor consolidation, shifts toward nearshore/offshore delivery, and the burden of investing in new technologies. Overall, AI is more a catalyst for changes in demand structure and higher competitive barriers than a one-way positive catalyst for immediate industry margin expansion.

Risks

• Downward revisions to French GDP growth expectations and the backdrop of the Middle East conflict could weigh on confidence in corporate IT spending.
• Low morale among smaller software and IT services companies could make industry survey results more cautious.
• Customers are narrowing their preferred supplier lists, which could disadvantage smaller IT service providers.
• Shifts in nearshore and offshore delivery models could change the competitive landscape for IT services.
• Higher operating costs associated with AI tools could compress software vendor margins.
• Agentic AI could replace or reduce spending on some non-core software applications.
• AI-related productivity gains could be passed on to customers while vendors bear additional investment costs, meaning margins may not improve.
• Green IT and energy efficiency have declined in CIO priority rankings, and related demand could weaken temporarily.

What to watch

• Whether software growth expectations continue to be lowered in subsequent Numeum surveys.
• Whether software and IT services growth in the second half of 2026 is stronger than in the first half as expected.
• Whether CIO views on agentic AI replacing software spending expand from non-core applications to core business systems.
• The actual monetization progress of AI features by software vendors and the cost of upgrading technology stacks.
• Whether IT service providers can convert demand for AI projects into revenue growth rather than merely improving customer productivity.
• Whether the trend toward insourcing IT services expands, particularly in areas of rapid technological innovation.
• Changes in the priority of cybersecurity, compliance, cost optimization, and generative AI in corporate IT budgets.