US software budgets are cautious, with AI, data, security, and cloud infrastructure as the budget winners

Overview

This report focuses on 2026 enterprise IT budget trends in the US software sector. Over the past month, UBS spoke with about 25 enterprise IT executives, procurement officers, and partners, focusing on IT spending growth, budget priorities and areas being downgraded, procurement contract changes, and customer reactions to changes in software pricing models. The report concludes that the overall IT budget environment is challenging, with macro and geopolitical uncertainty, AI-related spending crowding out other items, inflation and fuel costs, and slower client employee growth all weighing on budget growth; however, the budget mix continues to tilt meaningfully toward AI, data, cybersecurity, and cloud infrastructure.

Core views

The core view is: first, near-term budget pressure is likely to matter more for software companies' most recent one to two quarters of results than debate about medium-term AI disruption risk; second, 2026 budget growth will be more differentiated, with traditional SaaS and application software facing seat optimization, slower add-on sales, shorter contracts, and stronger price negotiations; third, AI has become the top enterprise budget priority and is driving demand for data quality, data governance, data platforms, cybersecurity, and cloud compute; fourth, UBS remains long-term constructive on AI, data, infrastructure, and security software, while staying restrained on chasing recently derated application software names, and continues to favor Palantir and Snowflake.

Analysis framework

The report primarily uses channel checks and client interviews, organizing qualitative feedback from enterprise IT executives, procurement officers, and partners around total budget levels, priority spending areas, downgraded spending, procurement contract changes, pricing negotiations, billing model changes, and stock-specific implications. The analysis is not centered on a single company financial model, but instead uses budget migration and procurement behavior changes to judge relative fundamentals and stock performance pressure across software sub-sectors.

Methodology notes

• channel_checkEnterprise IT budget interviews

  Observing budget trends through interviews with client IT executives, procurement officers, and partners

  UBS organized about 25 interviews into themes such as budget growth, priority areas, downgraded spending, and procurement behavior to assess the software demand environment.

• sector_rotationSoftware budget mix migration framework

  Budget shifting from SaaS and application software toward AI, data, security, and cloud infrastructure

  The report argues that slowing total budget growth does not mean all software categories face equal pressure; budget mix changes were the more important sector signal over the past year.

• procurement_analysisContract and pricing pressure analysis

  Changes in contract terms, pricing pressure, seat optimization, and usage-based billing

  Rising client uncertainty led some companies to sign shorter contracts, become more sensitive to price increases for seat-based application software, and set stronger budget guardrails when moving to usage-based billing.

Asset mapping & comparison

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

• SNOW.US / SNOWFLAKE INC

  Beneficiary of data infrastructure and AI enablement

  Strengths

  Enterprise AI deployment requires investment in high-quality data, data governance, data warehouses, and data platforms; the report notes that data lakes, data warehouses, and Snowflake-like platforms are infrastructure projects driven by AI roadmaps.

  Weaknesses

  A more cautious overall IT budget will affect broad software demand, and the Data/Infra subsector still has negative year-to-date performance.

  Comparison

  Compared with traditional application software, Snowflake is closer to AI and data budget priorities; but relative to higher-beta areas such as NeoClouds, stock performance may be less aggressive than the cloud-compute theme.

  Risks

  Tighter client budgets, project delays, cloud cost optimization, intensifying competition, and uncertainty around AI spend ROI.

• PLTR.US / PALANTIR TECHNOLOGIES INC

  Beneficiary of AI and data-driven decision-making

  Strengths

  Enterprise clients are making AI, data-driven decision-making, workflow automation, and productivity gains budget priorities, and Palantir aligns with AI applications and data integration themes.

  Weaknesses

  The report notes that although AI budgets are a priority, clients are demanding more proof of ROI and actual business value, so overly conceptual projects may be scrutinized carefully.

  Comparison

  Compared with seat-based application software, Palantir is closer to the AI budget priority; relative to security and cloud infrastructure, demand may depend more on specific project execution and customer use-case validation.

  Risks

  High valuation expectations, stronger AI project budget guardrails, longer customer procurement cycles, and tighter approval standards due to macro uncertainty.

• SaaS and application software vendors

  Primary budget downgrade and procurement pressure area

  Strengths

  There are still localized opportunities in large platform vendors, ERP modernization, migration from on-premise to cloud, and vendor consolidation.

  Weaknesses

  Clients are controlling incremental spending, reducing seats, cutting add-on modules, and requiring vendors to prove value, while price increases for seat-based application software face greater resistance.

  Comparison

  Compared with AI, data, security, and cloud infrastructure, application software has a clearly lower budget priority, and the chart shows Apps down about 36% year to date, materially lagging other software subsectors.

  Risks

  Shorter contracts, longer sales cycles, larger price discounts, shrinking seat bases, and AI substitution for collaboration and manual workflow tools.

• Cybersecurity software

  Beneficiary of defensive and AI-related security demand

  Strengths

  Several clients said cybersecurity remains a priority, and AI proliferation, geopolitical risk, and regulatory requirements are supporting resilient security spending.

  Weaknesses

  If overall IT budgets compress further, security projects may also face approval-priority and vendor-consolidation pressure.

  Comparison

  Security is more resilient than application software; the chart shows Security up about 8% year to date, clearly better than Apps.

  Risks

  Budgets concentrating into fewer platforms, point solutions being consolidated, and valuations already reflecting defensive demand.

Key data

• Number of client and partner interviewsAbout 25 interviewsConversations over the past month with enterprise IT executives, procurement officers, and partners.
• Share with cautious 2026 IT budgets11/14, about 80%Among 14 budget-related interviews, about 80% said IT spending growth was stable, slowing, or contracting.
• Feedback showing healthy growth3/14, about 20%Only a small number of interviews still showed healthy IT budget growth.
• AI spending acceleration share13/16, more than 80%In 13 of 16 related interviews, AI spending was explicitly said to have become a much higher priority.
• Priority spending areasAI, data, cybersecurity, cloud infrastructureData spending is viewed as a key prerequisite for AI ROI, while security and cloud compute demand also remain resilient.
• Downgraded spending areasInternal employee growth, external IT staff, offshore systems integration, SaaS and application softwareClients want to control incremental software spending, seat counts, and add-on module purchases.
• Year-to-date performance by software subsectorNeoClouds about +95%, Hyperscalers about +9%, Security about +8%, Data/Infra about -8%, Apps about -36%From the chart description, showing that application software lagged materially while cloud and infrastructure-related areas were stronger.

Impact & implications

The investment implication is that the software sector cannot be viewed only through total IT budget growth; the direction of budget migration matters more. AI-related spending is crowding out parts of traditional software, services, and labor budgets, while data platforms, cybersecurity, cloud infrastructure, and platform companies with strong AI deployment use cases are benefiting relatively. By contrast, SaaS and application software vendors that depend on seat growth, add-on module sales, and broad enterprise application expansion may face greater pricing resistance, longer sales cycles, shorter contracts, and stricter value-proof requirements. Because the market has already partially priced in this framework, the report warns against simply chasing de-rated application software stocks.

Risks

• Overall IT budget growth could continue to slow or contract, broadening demand pressure across the software sector.
• AI budgets could crowd out traditional software, systems integration, outsourcing services, and internal labor budgets.
• Clients could raise ROI requirements, lengthen procurement negotiations, and shorten contract terms.
• Seat-based software could face seat optimization, price negotiations, and guardrails around usage-based billing.
• The market may already have partially priced the investment framework favoring AI, data, infrastructure, and security.

What to watch

• Whether actual 2026 enterprise IT budget growth continues to come in below plans set at the start of the year.
• Whether AI projects move from pilot to scaled deployment and create incremental budgets rather than pure substitution.
• Order conversion trends for data quality, data governance, and cloud infrastructure projects.
• Renewal rates, net revenue retention, seat growth, and discount trends for SaaS and application software companies.
• Whether contract terms continue to shorten and whether usage-based billing models trigger stronger client budget guardrails.
• Whether Palantir and Snowflake can continue to prove the revenue elasticity created by AI and data platform budget priority.