Jim Cramer Says Software Was the Story of Q3. The Numbers Agree

Salesforce, Inc. (NYSE:CRM) rose 46% over the third quarter, and Microsoft Corporation (NASDAQ:MSFT) rose 37%.

Jim Cramer told CNBC on October 1 that the quarter will be remembered as the moment software bounced back while some data center plays gave ground to profit-taking. The accounts behind those two moves say the rally was not sentiment. It was earnings.

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The Earnings Moved Before the Shares Did:

Start with Salesforce, because its figures are the clearest. Earnings grew 86.90% year over year in the most recent quarter while revenue grew 10.80%. When profit grows eight times faster than sales, the company is not selling more so much as keeping more of what it sells.

That is what a software business looks like when it stops spending to grow. The market had been pricing the opposite. Salesforce trades at 13.99 times forward earnings against 21.36 times trailing, and a forward multiple that low means earnings are expected to keep climbing.

A 0.78 PEG ratio says the same thing. The stock is priced below its own growth rate. Microsoft tells a steadier version. Revenue grew 17.70% and earnings 31.30%, on a 40.31% net margin that very few companies of any size reach.

Cramer’s argument was that AI stopped looking like a threat to these companies and started looking like something they sell. The margins are the evidence.

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What Profit Taking Did to the Other Side:

Cramer’s second point was that the data center names gave background, and he named Caterpillar Inc. (NYSE:CAT) as a fall worth stepping into. Caterpillar dropped 24% over the quarter and is still up 70.66% over twelve months. The fall came out of a very large run. Its business did not deteriorate. Revenue grew 24.00% and earnings 64.90%, with a 56.97% return on equity.

The problem is what that performance now costs. Caterpillar trades at 19.25 times book value, which for a company that makes machinery is a software multiple attached to a factory.

Cash is the other gap. Operating cash flow was $13.57 billion and free cash flow $5.05 billion, so most of it goes back into the business. So the quarter rotated money from assets priced on a build-out toward businesses whose margins had already improved. Not one of these three is owned for income. Ten stocks beat the market this year while paying one, and we ranked them here.

The Valuation Case:

Salesforce and Microsoft are paid for margins that already improved. Caterpillar is paid for construction that has not happened.

On price, the ranking reverses the quarter’s performance. Salesforce at 13.99 times forward earnings is the cheapest of the three, and Caterpillar at 25.38 times forward sits on 19.25 times book.

Microsoft carries the oddest figure. Operating cash flow was $182.93 billion and levered free cash flow $16.55 billion, a gap that is the capital spending behind the data centers Cramer says are now paying off. Whether that bill earns its return is the 2026 question, and we named ten stocks for the year ahead in this list.

Conclusion:

Cramer’s read holds up. Salesforce grew earnings 86.90% against 10.80% revenue growth, Microsoft kept 40.31% of revenue as profit, and the market had both priced for less. However, Caterpillar’s 24% fall did not come with any deterioration in its numbers, which grew 64.90% at the bottom line. What changed was the 19.25 times book value being asked for them. The number to watch is Microsoft’s free cash flow, because that is where the data center bill shows up.

Market Sentiment:

Salesforce, Inc. was held by 99 hedge funds with a combined stake value of about $6.44 billion at the end of Q2 2026 in the Insider Monkey database. This is down from 101 hedge fund holders with a cumulative investment value of around $6.87 billion in the previous quarter.

Microsoft Corporation was held by 273 hedge funds with a combined stake value of about $66.51 billion at the end of the same quarter. This is down from 282 hedge fund holders with a cumulative investment value of around $63.58 billion three months earlier.

Caterpillar Inc. was held by 84 hedge funds with a combined stake value of about $20.95 billion at the end of the same quarter. This is down from 87 hedge fund holders with a cumulative investment value of around $14.08 billion three months earlier.

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This article is originally published at Insider Monkey.