There’s been a sea change among tech investors during the past month: Software stocks are hot, while semiconductor makers are not.
Wall Street is rotating out of the chip sector, put off by stretched valuations and trade war-related risks under Donald Trump. Already a vocal critic of the Chips Act, the President-elect vowed on Monday to impose additional tariffs on China, Canada and Mexico. Software, in contrast, has been on an upswing. Investors are positive on the group given its lower exposure to tariff risks, and as the tailwind from artificial intelligence looks set to shift from infrastructure to services.
“Software got left behind, but looks to be the next winner from AI, while it could also benefit if the new administration is more lenient on regulation and M&A,” said Bill Stone, chief investment officer at Glenview Trust Co. On the flip side, “there’s so much good news in chips, especially AI chips, that the valuation has gotten steep at a time when there’s more uncertainty.”
Recent earnings reports underline the sentiment shift. Shares in data-analysis software company Snowflake Inc. soared on the back of a robust forecast, while demand for AI software fueled Palantir Technologies Inc.’s blowout report. In contrast, even strong results from Nvidia Corp. failed to excite investors.
So far in November, a major exchange-traded fund that tracks software is up 16%, putting it on track for its biggest one-month gain in a year, although it was flat on Tuesday. A semiconductor fund, meanwhile, is up less than 2% this month. Flows into the software ETF have also far eclipsed the chip fund, according to data from Bloomberg Intelligence.
The outperformance represents “an all-time record move for software vs. semis,” according to Michael Toomey, managing director of equities trading at Jefferies. Still, the shift “barely makes a mark in the 10-year chart” of their relative performance, suggesting room for the trend to continue, he said.
The extent of the rotation will depend on how things play out under Trump. Sean O’Hara, president of Pacer ETF Distributors, sees “a lot of uncertainty for chipmakers around the tariff side of things.” That’s created the potential for volatility, especially because chip stocks have already had a big AI-related rally. “At the same time, I think we’ll see more focus on AI software,” he said.
So far, the AI theme has benefited chipmakers much more than software firms, with companies pumping money into the chips and servers they need to run the technology. Meanwhile, only a few software companies — like Palantir, Microsoft Corp. and Oracle Corp. — have seen meaningful AI-related tailwinds. But software and services may be the next place that sees an inflection in AI growth.
At the same time, being the first major beneficiary of the AI trade has left chipmakers looking expensive. The Philadelphia Semiconductor Index trades at 24 times estimated earnings, above its 10-year average of 18, with stocks like ARM Holdings Plc and Nvidia among the most expensive. That could mean more downside risk if headwinds emerge, while Nvidia’s report showed that it may take even bigger beats to keep lifting the sector.
To be sure, semiconductor stocks remain a popular place for growth. According to Bloomberg Intelligence, earnings for chip companies are expected to grow 40% in 2025, compared with about 12% for those in the software and services industry. Sales growth is also expected to be much stronger for semiconductor firms.
The next big test for software will come in early December, when Salesforce Inc. reports results. The company has been hiring aggressively to push its new generative AI agent product, and strong results from the company will help sustain the sector’s rally, according to Jordan Klein, a tech-sector specialist at Mizuho Securities.
“Post-election, generalist and tech investors are faced with the struggle of owning much more software (and fintech) and owning a lot less semis,” he wrote. “Missing out on these moves leaves some in a bad spot.”
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