The 'DOGE Cost-Cutting Sword' is hanging high, and U.S. tech stocks may lose a major client

According to Zhitong Finance APP, Elon Musk's efforts to cut $1 trillion in federal spending have added another risk for beleaguered tech investors, potentially costing the already precarious industry billions in revenue. Major companies such as Microsoft (MSFT.US), Automatic Data Processing (ADP.US), Autodesk (ADSK.US), SAP SE (SAP.US), and Oracle (ORCL.US) could be affected by cuts in U.S. federal government spending, as they have historically benefited from federal contracts. Last month, the U.S. Department of Defense announced it would terminate plans to use Oracle software to manage civilian personnel.

For investors already grappling with the impact of President Trump's announcement of high trade tariffs, the federal spending cuts complicate matters further. Trump's imposition of high trade tariffs has sent shockwaves through the global economy.

It is difficult to estimate how much revenue may ultimately be at risk, but the U.S. government is a notable customer, and investors are watching closely. According to Bloomberg analyst Niraj Patel's analysis of IDC data, the federal government is expected to consume or purchase nearly $40 billion worth of software and public cloud services by 2025.

Damian McIntyre, portfolio manager and senior quantitative analyst at Federated Hermes, commented on Musk's cost-cutting measures: "If you are a company with government exposure, investors don't know what kind of growth to expect, and they are less willing to pay for it."

For example, nearly all of the revenue for IT services company CACI International (CACI.US) comes from the government, while Science Applications International Corporation (SAIC.US) stated that 98% of its fiscal year 2025 revenue is "attributable to prime contracts with the U.S. government or subcontracting agreements with other contractors working for the U.S. government." Both indices have dropped more than 20% since the election.

Meanwhile, according to supply chain data, nearly 8% of Accenture's (ACN.US) revenue comes from the U.S. government. This IT consulting firm noted that Musk's Department of Government Efficiency (DOGE) was a factor contributing to last month's poor performance. Its peer Gartner Inc. has stated that about $1.2 billion of the company's unearned revenue contracts belong to government entities, and UBS recently listed the company's government exposure as a concern. International Business Machines Corp. has performed better, with JP Morgan noting that the company "may be more resilient than Accenture"; it is also seen as a winner in the spending frenzy surrounding artificial intelligence DOGE has not come close to the $2 trillion reduction in federal spending that Elon Musk initially proposed. On Wednesday, media reports indicated that Musk might step back from his quasi-government role to manage his businesses again. Although Musk denied this report, several companies most affected saw their stock prices rise in response to the news.

Nevertheless, many agencies, aside from the U.S. Department of Defense, are actively cutting costs, and Musk claims he will reduce spending by $1 trillion by the end of next month. As government spending cuts could impact education, healthcare, business services, tourism, and other sectors, software stocks may be broadly affected. According to BI data, ServiceNow (NOW.US) is considered particularly vulnerable to a slowdown in new contract growth, as 11% of the company's sales come from the public sector, a high percentage compared to its peers.

According to data, earnings for software and services companies are expected to grow by 11.6% in 2025, down from the 12.3% projected in early February. Revenue expectations are also trending downward. Sean Brehm, chairman of Spectral Capital, stated, “Investors looking to invest in such companies may need to have certain concerns. Some contracts will continue, but we do not yet have a full understanding of the situation, which means we are in a state of uncertainty.”