MW Why software stocks could see fresh shine after Trump's presidential victory

By Emily Bary

Analysts see the potential for a friendlier merger climate and growth in IT budgets

Software stocks have roared back to life since early August, and analysts think that rally can persist into a second Trump administration.

"Overall this could be a catalyst for investors to focus again on software as expectations could increase that IT budgets will grow more than previously expected," Bernstein analyst Mark Moerdler wrote.

He reasoned that expectations of a better economic climate in the U.S. could foster more optimism about the potential for companies to grow their information-technology spending.

Moerdler also thought software companies stand to benefit from a friendlier regulatory backdrop, which is expected now that Donald Trump has won a second presidential term.

The iShares Expanded Tech-Software Sector ETF IGV is ahead 3.6% in morning action and up about 25% from its Aug. 5 low.

"Antitrust, which increased under the Biden presidency, is also likely to decrease (but by no means go away)," Moerdler wrote. "This should not only help drive more M&A but may, we believe, drive more investment especially in later stage private companies because the exit options are better."

He noted that while Microsoft Corp. $(MSFT)$ was able to gain clearance for its Activision-Blizzard deal under the Biden administration, Adobe Inc. $(ADBE)$ had to abandon plans to acquire Figma.

"Note that we do not believe that existing investigations will be meaningfully impacted as change will take time," he wrote.

Evercore ISI's Kirk Materne weighed in that Trump's win could be a boon for smaller software companies when thinking about the merger climate going forward.

"From a policy perspective, there was not much on the ballot for software last night but the potential of a more relaxed regulatory backdrop clearly helps SMID-cap names in terms of the potential for more M&A" in 2025, he wrote, referring to small- and mid-cap names.

Still, there are some potential negatives that investors should mind as well, according to Bernstein's Moerdler, especially when thinking about Trump's interest in heightened tariffs.

See also: Tesla's stock is soaring on Trump's win. Here's why Wall Street is so upbeat.

"The concern for software is that other countries will respond totariffs on their industries by either placing tariffs on U.S. industry but also driving the creation of local competitors which could impact cloud in general," he wrote.

Then there's the hot topic of artificial intelligence. Companies have been investing heavily in the technology, but it's caught the attention of government bodies due to its risks.

Generative AI "could see continued scrutiny by not just regulators but also the House and Senate (and the world in general) on regulating AI," Moerdler said in his report. "We believe we will continue to see the creation of new laws/regulations," though he doesn't expect these will curtail the use of generative AI.

Read: Banks and Tesla lead list of top-performing stocks following Trump's victory

-Emily Bary

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November 06, 2024 11:08 ET (16:08 GMT)

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