As the Trump administration’s trade war clouds the economic outlook, software stocks have emerged as a favorite place for investors looking for a respite.
Results from Microsoft Corp. and ServiceNow Inc. have undergirded what has been a central bull argument for the sector, namely that they continue to deliver robust growth, including from artificial intelligence, while having limited risk from tariffs, the key issue driving overall volatility.
A thaw in the tariff battle potentially diminishes a risk to tech companies with products like hardware or semiconductors, as was seen in Monday’s stock market rally. But software results underline the group’s fundamentals, and in the meantime uncertainty remains and tariffs haven’t gone away.
Software has dramatically outperformed this year relative to the rest of tech, and the sector’s strong results stand in contrast to the tech giants that deal in more tangible product categories, which have shown more signs of struggling in this environment. Apple Inc., Amazon.com Inc., Arm Holdings Plc, and Qualcomm Inc. have all disappointed this season.
“The software model has a lot of attributes that make it attractive in volatile economic times, so we’re far more positive on it than hardware,” said Stephen Bersey, head of technology research at HSBC, who singled out companies he views as high quality, including Microsoft, ServiceNow, Oracle Corp., and Salesforce Inc., the latter two of which will report in coming weeks.
Bersey notes that being a digital product, software doesn’t need to be physically shipped and doesn’t face a major impact from tariffs. “At the same time, we saw indiscriminate selling after the tariffs were announced, which means several high-quality names got to be a good value,” he said.
An index of software companies is up nearly 5% this year, compared with a decline of almost 1% for the Nasdaq 100 Index. The Philadelphia Stock Exchange Semiconductor Index has dropped 4% while an index for hardware stocks is down just shy of 13%.
Among the highlights of the sector, Microsoft recently had its biggest one-week gain in more than two years following its results, which beat expectations and showed strong demand for its AI products. It also gave a positive forecast for its cloud computing business. The stock has jumped more than 25% off its April low, a rally that has made it the world’s largest company by market capitalization, taking the title from Apple.
Separately, ServiceNow shares saw their biggest jump in more than a decade after its own report showed solid demand trends, along with a positive outlook. The company followed that with a well-received event where it said its main AI software product would hit US$1 billion in annual contracted business by next year. Datadog Inc. and Twilio Inc. are also among the reports that were greeted warmly.
There have been some disappointments, including Atlassian Corp. which gave a cautious outlook. In addition, Palantir Technologies Inc. raised its forecast last week, describing AI demand as a “ravenous whirlwind.” While the stock fell after the report, it remains one of the biggest gainers of the year, up 57%, resulting in a valuation many see as elevated.
Growth outlook
The fact that major companies have reported such robust results has helped make Wall Street analysts more positive on the group. Software companies are expected to post earnings growth of 13% this year, according to Bloomberg Intelligence, up from the 11.6% pace that was seen about a month ago. Revenue is expected to grow 10.6%, and that estimate has also risen over the past couple weeks.
While semiconductor companies are projected to show faster growth than software this year, estimates for the group’s earnings have trended lower.
Tariffs have been a central reason for the uncertainty. Before the latest U.S.-China announcement, Apple said tariffs would add $900 million in costs this quarter, Amazon warned about the tougher economic climate as tariffs impact consumer spending, and forecasts from both Qualcomm and Arm were weaker than expected, underlining concerns over their growth potential. Relatedly, chipmaker Advanced Micro Devices Inc. said restrictions on sales to China will cost $1.5 billion in revenue this year.
George Cipolloni, a portfolio manager at Penn Mutual Asset Management, sees two “buckets” for tech investors to consider, one with companies that face tariff headwinds, and one for companies without.
“You need to be very selective if you’re considering stocks in the tariff bucket, which might have more upside if we get good news with tariffs, but otherwise have more risk,” he said, adding that Amazon and Apple are “doing the best they can under bad circumstances,” but that they didn’t yet look cheap enough for him to want to take the risk.
“On the other hand, the non-tariff basket is very easy to own right now, and it should outperform so long as the backdrop is uncertain,” he said. “Right now, this basket is full of software.”
Tech chart of the day
Some of the toughest new laws attempting to rein in TikTok, Instagram and Snapchat aren’t coming from Washington or Brussels. They’re emerging from capitals such as Canberra, Jakarta and Kuala Lumpur.
For Meta, Southeast and South Asian nations make up significant global shares of Instagram and Facebook user accounts, with those consumers tending to be younger, according to data from digital consulting firm Kepios Pte, which specializes in analyzing online behaviour.
Top tech stories
- SoftBank Group Corp. reported a 124% jump in quarterly profit on resilient AI demand that supported startup valuations and chip unit sales, in a boost to its aggressive data center investment plans.
- Samsung Electronics Co. on Monday rolled out a slimmed-down Galaxy S25 Edge smartphone, kicking off a wave of drastically thinner handsets expected to launch this year.
- Meituan plans to spend $1 billion to bring its food delivery service to Brazil, as one of China’s biggest internet companies pushes its global expansion after entering the Middle East.
Earnings due Tuesday
- Earnings Postmarket:
- SoundThinking Inc. (SSTI US)
- Earnings Other:
- Silicon Laboratories Inc. (SLAB US)
With assistance from Subrat Patnaik and Newley Purnell.
Ryan Vlastelica, Bloomberg News
©2025 Bloomberg L.P.
