Investing.com — Tech stocks have wobbled into the start of the new year, but the US software sector remains inexpensive and is set to ride the third major tech cycle as consumer and enterprise AI adoption grows more rapidly, analysts from BofA said in a recent note.
“The US Software (ETR:) sector is not inexpensive after rallying 59% in 2023 and 23% in 2024,” BofA said in a recent note, pointing to numerous tailwinds including the unfolding Agentic AI wage, which is AI that can perform tasks taking initiative without constant human oversight, that will likely play a big role in the next leg of growth for software companies.
Five Key US Software Trends for 2025
- Enterprise AI pilots move to production: Demand for AI solutions will increase significantly as companies transition from pilot projects to full-scale implementations, driving substantial investment in software that supports enterprise AI capabilities.
- Software companies provide quantitative commentary on AI adoption and monetization: Qualitative commentary on increased AI adoption from firms during 1H25 earnings is expected to evolve into quantitative indications of incremental revenue in the second half of the year before monetization becomes meaningful in 2026-27.
- AI software spend cannibalizes low-priority IT projects: Companies are expected to prioritize spending on investments in AI over less critical IT initiatives.
- Agentic AI and SLM (NASDAQ:) development gain momentum: Agentic AI and small language model solutions are expected to gain momentum amid rising demand for automation to improve operational efficiency.
- DevSecOps productivity accelerates as low/no-code apps proliferate: The increasing availability of low-code and no-code platforms will empower more teams to manage IT development , security and operations functions to enhance productivity across various departments.
Three Secular Themes for 2025
- Agentic AI offerings become the key differentiator for software solutions: As competition intensifies, software providers that integrate Agentic AI capabilities may increasingly capture market share from the $12 trillion US Services industry.
- Enterprise IT budgets accelerate in 2025/2026 as small business IT spending remains constrained through 1H25: Larger enterprises are expected to increase their IT investments significantly, while small business spending is likely to remain constrained amid macro headwinds.
- Sustained cloud migration drives revenue growth acceleration as optimization headwinds ease: the ongoing migrating to cloud-based solutions, will drive up operational efficiencies and cost savings, bolstering revenue growth for cloud service providers.
Top 10 Software Companies to Own for 2025
CRM and Infrastructure subsectors are most favorably position to ride the positive trends and secular backdrop, BofA said, highlighting its list of top 10 buys for 2025 that includes Salesforce Inc (NYSE:), HubSpot Inc (NYSE:), Microsoft Corporation (NASDAQ:), ServiceNow Inc (NYSE:), Datadog Inc (NASDAQ:), Gitlab Inc (NASDAQ:), Global-E Online Ltd (NASDAQ:), Five9 Inc (NASDAQ:), Monday .Com Ltd (NASDAQ:), Asana Inc (NYSE:).
