Software Index

State of the Market

The software sector suffered a historic 13% crash in early February as the launch of agentic tools like Anthropic’s "Claude Cowork" forced a reassessment of traditional per-seat pricing models. Microsoft exemplified this volatility—despite reporting record Q2 revenue of $81.3 billion (up 17%) and 39% Azure growth, its stock fell over 15% year to date as investors weighed the sustainability of the SaaS model. This shift signals a broader industry pivot toward intent-driven systems. However, future growth requires unprecedented capital: aggregate hyperscaler CapEx is projected to exceed $650 billion in 2026. While Microsoft’s $625 billion contracted revenue signals high demand, skepticism persists because 45% of that backlog is concentrated in OpenAI, a partner that has yet to demonstrate sustained profitability. The per-seat model is increasingly seen as vulnerable to an "AI earthquake" that favors economics based on consumption or performance.

In public equities, February kicked off with markets reaching new heights, as the S&P 500 and the Nasdaq both rose to record levels on solid corporate earnings. The Dow's gains also suggested some broadening beyond tech. However, this upward drift stalled, as tentative optimism gave way to concerns about apparent labor strains, and indices receded from their new highs.

The recent jobs report highlighted segmented gains, with nonfarm payrolls adding 130,000, doubling forecasts of about 70,000. Private sector additions carried the weight, led by health care, social assistance, and construction, while manufacturing stayed flat and federal roles declined. Unemployment dipped to 4.3%, but sharp 2025 revisions, which slashed 400,000 jobs from the record, exposed a deeper stagnation than was initially reported.

This labor market volatility is increasingly underpinned by structural shifts; namely, the accelerating adoption of AI. A recent Stanford study revealed 16% fewer entry-level hires in exposed fields since late 2022, disproportionately affecting young workers. Firms report productivity gains but net job cuts, often pre-adoption. This softening, occurring amid solid growth, signals a shift favoring capital over labor, as AI 'ownership' by model providers transfers income share from workers to capital owners, risking wider inequality if AI replaces rather than augments roles.

Inflationary pressures cooled in January, with the headline Consumer Price Index (CPI) decelerating to 2.4% year over year, down from 2.7% in December. This reading was slightly below the anticipated 2.5%, largely aided by a 1.5% monthly drop in energy prices and a 3.2% decline in gasoline costs. However, core inflation remained sticky at 2.5%, as shelter costs continued to rise at a 3.0% annual rate. Simultaneously, the latest Producer Price Index (PPI, December) held firm at a 3.0% annual rate, indicating that while consumer prices are cooling, input costs for firms remain elevated, complicating the path to the Federal Reserve's 2.0% target. On January 30, President Trump nominated Kevin Warsh as the incoming Chair, poised to take over from Jerome Powell in May 2026, which will usher in a period of higher uncertainty in rate decisions.

GDP provides a solid base: Q3 2025 at 4.4% annualized, with Q4 estimates at 3.7%. Quarterly 2026 forecasts moderate to 2.2%, 2.0%, 2.1%, and 2.2% for each quarter respectively. The IMF's upward revision to 3.3% global growth for 2026 highlights U.S. demand's role. For 2026's balance, watch fiscal boosts from the ‘One Big Beautiful Bill’ tax refunds and reciprocal trade agreements with partners like Taiwan, India, and Bangladesh, offset by 'jobless expansion' risks. Monitor February jobs and FOMC minutes for Fed easing signals amid sticky core inflation.