While shares of Palantir Technologies soared after Donald Trump's presidential election win, investors in other software makers and technology companies should keep an eye on plans to downsize the federal government. Budget cuts loom as a wild card for software makers as well as Palantir stock.
Elon Musk and Vivek Ramaswamy are the co-leaders of President-elect Trump's "Department of Government Efficiency" (DOGE), an advisory panel focused on cutting spending and the size of the federal government.
Musk, Ramaswamy Head DOGE Push
"The so-called DOGE boys aim to cut $2 trillion from government spending but haven't yet specified over what time period," said economist Ed Yardeni in a report. "It can't be done over a one-year period because discretionary spending is only $1 trillion. Doing it over a 10-year period would amount to average reductions of $200 billion per year. The problem is that nondiscretionary spending will continue to grow, led by ever rising net interest outlays. Defense spending (will be) among the mandatory spending categories that are bound to rise given the unsettling state of international relations."
He added: "We've often said that we will worry about the federal deficit when bond investors start worrying about it. That seems to be happening now. For now, we expect the bull market to continue after a pullback/correction because we expect that Trump 2.0 will make some progress in reducing the federal deficit outlook while boosting economic growth."
While DOGE could recommend upgrading aging federal computer systems, another possibility is letting go government employees.
Palantir Stock: Defense Spending
"We see a new era of software innovation in the Beltway and DOGE will be the catalyst for more focus on using software players over the coming years," Wedbush Securities analyst Daniel Ives said in an email.
He added: "There is massive inefficiency in the 202 area code and that is a major opportunity for the likes of Oracle, Microsoft, Palantir, ServiceNow, and Salesforce among many others."
Possible DOGE ramifications have been popping up in Wall Street analyst reports on software makers as well as information technology system integrators such as Accenture.
Many software makers sell annual subscription services on a "per-seat," or per-employee basis.
"Whatever you think of the merits or ideas that may come out of DOGE, it sounds like we are in for spending cuts at the U.S. federal government," KeyBanc Capital Markets analyst Jackson Ader said in a report on ServiceNow.
He added: "There are two sides to this. There is the software-optimism side: this is about efficiency so cuts to human capital will be replaced by investments in software; DOGE is good for software. Then there is the other side: cuts mean cuts and the environment will simply not be one in which spending on anything, including additional software, will be easily done. We are in the latter camp."
DOGE 'Hiccups' Coming?
In late December, Congress passed a funding bill that averted a government shutdown.
JPMorgan analyst Mark Murphy in a 2025 outlook said investors should be ready for volatility.
"Sequencing and directionality of DOGE impact creates hiccups and volatility rather than clear and immediate tailwind for all software companies," he said.
When it reported fiscal first-quarter earnings, global IT services company Accenture told analysts that U.S. federal government services provided 8% of total revenue in fiscal 2024.
"The incoming Trump administration has widely promised federal government spending cuts, though the degree and scope remain somewhat uncertain," TD Cowen analyst Bryan Bergin said in a report.
"Importantly, DOGE leaders have explicitly acknowledged that it intends to invest more in tech modernization initiatives, not less, highlighting inadequate/antiquated tech as a cause of inefficiencies."
At Mizuho Securities, analyst Sean Kennedy in a report noted input from a consultant at a top IT services firm.
"Our expert sees drastic decreases in U.S. federal government IT services budgets over the next 6 to 12 months across all federal departments due to the new administration's DOGE program," Kennedy said.
Palantir Stock Posts Big 2024 Advance
"Our expert believes larger and best-in-class IT services companies will fare best over the next few years as the government looks to rationalize its vendor list. He expects federal IT services budgets will see significant decreases in 2025 and a possible recovery in 2026 with an emphasis on next-generation services like gen AI."
Palantir, a maker of data analytics software, could gain if artificial intelligence plays a bigger role in homeland security or defense spending.
UBS analyst Karl Kierstead launched coverage of Palantir stock on Dec. 18 with a neutral rating.
"Qualitatively, Palantir shares already reflect a view that the company is a major AI/data beneficiary as well as a likely winner of efficiency — DOGE-led improvements at the U.S. federal government," he said in a report.
Meanwhile, Palantir stock has advanced 360% in 2024.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
