Software Index

State of the Market

Late 2025 underscored the persistent momentum in the software and AI sector, as demand for advanced computing infrastructure remained undiminished despite broader economic headwinds like tariff uncertainties and moderating labor markets. Nvidia delivered record third-quarter revenue of $57.0 billion, driven overwhelmingly by data center sales tied to generative AI training and deployment, which now account for over 85% of its total. This demonstrates that enterprises are prioritizing scalable AI capabilities to enhance efficiency and innovation. This surge not only highlights Nvidia’s dominance in GPU technology but also raises questions for investors about sustainability, as potential supply chain disruptions from geopolitical tensions could pressure margins, though ongoing R&D investments position it well for long-term growth in emerging areas like edge computing. Palantir accelerated its commercial trajectory, posting U.S. commercial revenue growth exceeding 120.0% as enterprises increasingly turned to its platforms for operational AI applications, moving beyond traditional government contracts to capture a broader market share in data analytics and decision-making tools. This pivot underscores a maturing AI ecosystem where software firms are leveraging proprietary algorithms to deliver tangible ROI, yet it also invites scrutiny on valuation multiples amid a cooling venture funding environment, offering opportunities for patient investors betting on enterprise digital transformation.

In general economic news, December 2025 brought a measure of clarity after November’s data blackout, as delayed economic reports began to emerge and markets responded to renewed Federal Reserve action. The S&P 500 advanced roughly 2.0% from mid-November levels, buoyed by the central bank’s rate cut and resilient consumer activity during the holiday season, though tariff-related uncertainties tempered broader gains.

The resolution of the government shutdown allowed the Bureau of Labor Statistics to release the long-delayed September employment report on November 20, initially showing nonfarm payrolls rose by 119,000—modest but above lowered expectations. Subsequent revisions adjusted September’s figure down to 108,000. The October employment data, released alongside November’s report, indicated a decline of 105,000 jobs, primarily due to a sharp drop in federal government employment (-162,000) stemming from deferred layoffs. No household survey was conducted for October due to the shutdown, limiting insights into unemployment trends for that month. The November employment report showed nonfarm payrolls increased by 64,000, slightly above some forecasts but still signaling a cooling labor market amid lingering shutdown distortions and private-sector caution. Key gains occurred in health care (46,000) and construction (28,000), offset by declines in federal government and transportation. The unemployment rate stood at 4.6% in November, little changed from September, reflecting gradual softening from earlier rebound levels.

Despite labor market moderation, underlying economic momentum held firm. Third-quarter GDP is projected to be a robust 3.8% annualized rate, driven by consumer spending and business investment. Early nowcasts for the fourth quarter suggest growth near 2.5-3.0%, supported by strong November retail sales, though import surges ahead of new tariffs introduced some front-loading effects.

Inflation readings have shown signs of cooling. The Consumer Price Index for November rose 2.7% year over year, down from 3.0% in September, with core measures easing to 2.6%. This was lower inflation than expected. Tariff pass-throughs have influenced goods prices, particularly in holiday categories like toys and electronics, though overall inflationary pressures eased in November despite these factors, with energy costs providing some relief.

On December 10, the Federal Reserve lowered the federal funds rate by 25 basis points to a target range of 3.50-3.75%—its third cut of 2025. The decision acknowledged progress toward 2.0% inflation while highlighting balanced risks to employment and prices. Updated projections signaled a more cautious pace of easing ahead, reflecting concerns over persistent services inflation and policy-induced cost pressures.

Tariff developments added another layer of complexity. The administration extended certain exclusions and pursued targeted deals, but broader implementations continued to raise input costs for importers, with early estimates suggesting a 0.2-0.3 percentage point lift to 2026 inflation if escalations persist.

Looking forward, risks remain centered on potential tariff-driven price pressures and sustained labor market softness, as evidenced by recent modest job gains and elevated unemployment compared to last year. Opportunities persist in sectors less exposed to trade frictions, such as domestic technology and energy. These factors, along with the recent cooling in inflation, will heavily influence the outlook into early 2026.