Software Index

State of the Market

Investors are grappling with four key crosscurrents that have significantly impacted markets in 2025: persistent inflation, the Fed, sector rotation, and overarching policy uncertainty about future fiscal and regulatory measures.

Inflation climbed in January, with the Consumer Price Index (CPI) rising 0.5% from December and 3.0% from January 2024. More concerning, Core Inflation (which excludes the most volatile categories, such as food and energy prices) was worse than expected and rose 3.3% annually.

As inflation continues exceeding the Fed's 2% target rate, the likelihood of another rate cut in 2025 diminishes. According to Bloomberg, current bond-market pricing forecasts the next rate cut will be in October 2025, with a slight chance of rate hikes in 2026.

After dominating markets for the last two years, a rotation away from tech may be underway. Earnings growth for the Magnificent 7 (Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta, and Tesla) has fallen in line with the rest of the S&P 500. Tech stocks have been among the worst performers this year, while materials, financials, and communication stocks have outperformed.

Finally, investors have reacted with excitement and caution as the Trump administration has moved at an extraordinary pace to implement policies that will reshape the economic landscape. Macroeconomic and company-specific forecasts have shifted almost daily as the Trump administration introduces new proposals concerning trade, taxation, government spending, immigration, and regulations on AI and cryptocurrency.

Enterprise software is expected to grow despite these challenges. Although  software budgets are flat, AI spending will dramatically increase in 2025. And venture investors are funding some of the fastest-growing startups ever at historic valuations. SAAS companies that successfully implement AI (organically or through acquisition) will reap the rewards of the AI revolution.