Software Index

State of the Market

Investors experienced an equity market correction as February turned to March, with major US indices dropping more than 10%. While the new administration initially sparked market optimism, uncertainty regarding trade and monetary policy has tempered that excitement. Indeed, uncertainty is the word of the day.

The current economic environment has created challenging crosswinds for investment decisions. Key questions loom: How should tariff expectations guide capital expenditures? Will the Federal Reserve maintain high rates to fight inflation or lower them to stimulate investment? Can consumer spending maintain its current pace?

Such uncertainties stall investment and create consternation both in boardrooms and at kitchen tables. Political leadership’s acknowledgement that short-term economic pain may be necessary in the pursuit of longer-term prosperity has added to these concerns. Yet there’s optimism about potential productivity gains from the ongoing AI revolution.

Until clearer market indications emerge, investors are taking a cautious approach to valuations. The uncertain environment has made cash flow projections less reliable, driving many investors toward the safety of bonds. Only defensive sectors—healthcare, utilities, consumer staples—and international markets have provided refuge among equities.

Enterprise software valuations felt the impact of this correction. NTM multiples dropped 12.7% for our full dataset and 8.0% for our top ten companies, falling to 5.2x and 13.8x respectively. This decline occurred despite stable expectations for revenue growth and margins, highlighting the macro environment’s broad influence even amid significant AI developments.

February’s economic indicators were mixed. Non-farm employment grew by 151,000, while unemployment edged up to 4.1% from January’s 4.0%—both slightly below expectations. However, inflation data showed improvement, with CPI coming in at 2.8% (All items) and 3.1% (Core).