Morgan Stanley Bullish on Software Stocks for Second Half

by MarketNewsData

Morgan Stanley remains upbeat on software stocks heading into the second half of 2025, citing a mix of tax, currency, and AI tailwinds that could support continued outperformance despite high valuations.

Key Points:

  • Resilient in Trade & Policy Shifts
    Software companies like Okta (OKTA), Salesforce (CRM), and Atlassian (TEAM) are seen as relatively insulated from tariffs and supply chain disruptions, given their minimal reliance on physical goods.
  • Tax Reform Boost
    The new U.S. tax code allows full and immediate expensing of R&D, which Morgan Stanley estimates could lift free cash flow margins by up to 10 percentage points by 2026 for names like OKTA and TEAM.
  • Dollar Weakness a Tailwind
    With the U.S. dollar pulling back in 2025, companies with significant international revenue exposure—like CRM—stand to benefit from favorable FX translation.
  • AI-Fueled Demand
    Generative AI is translating into real productivity gains, not just hype. Morgan Stanley notes that software vendors integrating AI into enterprise workflows—such as CRM and TEAM—are well positioned to capitalize on expanding budgets.
  • Front-Office Software Acceleration
    Spending on front-end systems (CRM, marketing, support) is rebounding. CRM and TEAM are among those gaining traction as businesses reinvest in customer-facing platforms.

Valuation Still a Concern, but Justified
Morgan Stanley acknowledges that software stocks remain expensive, with many trading at 35–40× forward earnings. But the firm sees annual earnings growth in the low double digits through 2027 as a fair offset.

Bottom Line:
Despite rich valuations, Morgan Stanley sees the software sector—especially names like OKTA, CRM, and TEAM—as a solid play for the rest of 2025. Tailwinds from AI adoption, tax benefits, and dollar weakness are expected to keep demand and margins strong.

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