Over the last month, tech investors have turned their back on semiconductor manufacturers and invested more money into software stocks. At the same time, Wall Street is shying away from the chips sector because of high valuations and growing trade war risks under President-elect Donald Trump. 

After being overlooked recently, software now looks like it might be the next winner in AI, according to Bill Stone, chief investment officer at Glenview Trust Co. And it could gain more popularity if the new administration is more relaxed on regulation, mergers, and acquisitions. 

Trump has vowed to impose further tariffs against China, Canada, and Mexico while speaking out against the Chips Act. On the other side, software companies are picking up speed with AI due to lower exposure to tariff risks.

Recent earnings report shows a shift in sentiment

Data analysis software firm Snowflake Inc.’s shares surged following a robust forecast. In contrast, investors did not seem to be excited by even strong results from Nvidia Corp.

A major exchange-traded fund that tracks software (iShares Expanded Tech-Software Sector ETF) is up 16% in November. The same stock has seen VanEck Semiconductor ETF rise by less than 1%, according to Bloomberg Intelligence data.

According to Michael Toomey from Jefferies, the outperformance is “an all time record move for software vs. semiconductors.” He added that the trend has a long way to go to continue as the shift “barely makes a mark in the 10 year chart.”

It depends on how far this will go under Trump’s administration. Bloomberg reported that Sean O’Hara, Pacer ETF Distributors president said that there is “a lot of uncertainty for chipmakers around the tariff side of things.”

Semiconductor chips still retain growth potential in AI

The AI race has mostly revolved around chipmakers. So far, companies have spent more time and money on the chips and servers they need to run the technology than investing in software firms. However, software and services may be due for more attention in the AI sector.

Since chipmakers have been the first major beneficiaries of the AI boom, they now look expensive to new investors. Stocks such as ARM Holdings Plc and Nvidia are quite expensive, and the Philadelphia Semiconductor Index trades at 24 times estimated earnings versus its 10‐year average of 18. 

Regardless of the sentiment shift, semiconductor stocks still have room for growth. Earnings for chip companies are expected to rise by 40% in 2025 compared with about 12% for software and services, according to Bloomberg Intelligence. Semiconductor firms are also expected to see much stronger sales growth over the couple of years.

The next big test for software comes early next month when Salesforce Inc. reports its results. The company has been promoting its new generative AI agent product aggressively while making new hires.

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