By Emily Bary
Analysts see the potential for a friendlier merger environment and growth in IT budgets
Software stocks have revived since early August and analysts believe the rally could continue until a second Trump administration.
“Overall, this could be a catalyst for investors to refocus 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 environment in the US could lead to more optimism about the potential for companies to grow their spending on information technology.
Moerdler also thought software companies could benefit from a friendlier regulatory environment, which is expected now that Donald Trump has won a second presidential term.
The iShares Expanded Tech-Software Sector ETF IGV is up 3.6% in morning action and up about 25% from its August 5 low.
“Antitrust enforcement, which increased under the Biden presidency, will also likely decrease (but certainly not disappear),” Moerdler wrote. “This should not only contribute to more mergers and acquisitions, but could, in our view, also lead to more investment, especially in later-stage private companies, as exit options are better.”
He noted that while Microsoft Corp. (MSFT) could win approval 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 existing studies will have a meaningful impact as change will take time,” he wrote.
Kirk Materne of Evercore ISI said Trump’s victory could be a boon for smaller software companies as they consider the future merger environment.
“From a policy perspective, there wasn’t much on the agenda for software last night, but the potential of a more relaxed regulatory framework clearly helps SMID cap names in terms of the potential for more mergers and acquisitions” in 2025, he wrote, referring to small businesses . and midcap names.
Still, according to Bernstein’s Moerdler, there are also some potential downsides that investors should keep in mind, especially when considering Trump’s interest in higher tariffs.
See also: Tesla’s shares soar on Trump’s victory. This is why Wall Street is so bullish.
“The concern for software is that other countries will respond to tariffs on their industries by either imposing tariffs on US industry, but also by encouraging the creation of local competitors, which could impact cloud in the general,” he wrote.
Then there is the popular topic of artificial intelligence. Companies have invested heavily in the technology, but its risks have drawn the attention of government agencies.
Generative AI “could see continued scrutiny from not only regulators, but also the House and Senate (and the world at large) on regulating AI,” Moerdler said in his report. “We believe we will continue to see the creation of new laws and regulations,” although he does not expect these to limit the use of generative AI.
Read: Banks and Tesla lead list of best-performing stocks after Trump’s victory
-Emilie Bary
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
06-24-11 1108ET
Copyright (c) 2024 Dow Jones & Company, Inc.
