Microsoft among software stocks offering haven in tariff chaos

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As U.S. President Donald Trump’s administration’s trade war clouds the economic outlook, software stocks have emerged as a favourite place for investors looking for a respite.

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Results from Microsoft Corp. and ServiceNow Inc. have undergirded what has been a central bull argument for the sector, namely that they continue to deliver robust growth, including from artificial intelligence, while having limited risk from tariffs, the key issue driving overall volatility.

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A thaw in the tariff battle potentially diminishes a risk to tech companies with products like hardware or semiconductors, as was seen in Monday’s stock market rally. But software results underline the group’s fundamentals, and in the meantime uncertainty remains and tariffs haven’t gone away.

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Software has dramatically outperformed this year relative to the rest of tech, and the sector’s strong results stand in contrast to the tech giants that deal in more tangible product categories, which have shown more signs of struggling in this environment. Apple Inc., Amazon.com Inc., Arm Holdings PLC, and Qualcomm Inc. have all disappointed this season.

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“The software model has a lot of attributes that make it attractive in volatile economic times, so we’re far more positive on it than hardware,” said Stephen Bersey, head of technology research at HSBC Holdings PLC, who singled out companies he views as high quality, including Microsoft, ServiceNow, Oracle Corp., and Salesforce Inc., the latter two of which will report in coming weeks.

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Bersey notes that being a digital product, software doesn’t need to be physically shipped and doesn’t face a major impact from tariffs. “At the same time, we saw indiscriminate selling after the tariffs were announced, which means several high-quality names got to be a good value,” he said.

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An index of software companies is up nearly five per cent this year, compared with a decline of almost one per cent for the Nasdaq 100 index. The Philadelphia Stock Exchange Semiconductor index has dropped four per cent while an index for hardware stocks is down just shy of 13 per cent.

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Among the highlights of the sector, Microsoft recently had its biggest one-week gain in more than two years following its results, which beat expectations and showed strong demand for its AI products. It also gave a positive forecast for its cloud computing business. The stock has jumped more than 25 per cent off its April low, a rally that has made it the world’s largest company by market capitalization, taking the title from Apple.

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Separately, ServiceNow shares saw their biggest jump in more than a decade after its own report showed solid demand trends, along with a positive outlook. The company followed that with a well-received event where it said its main AI software product would hit US$1 billion in annual contracted business by next year. Datadog Inc. and Twilio Inc. are also among the reports that were greeted warmly.