IBM warning on AI spending squeeze sends software stocks tumbling

IBM shares fell about 20% in premarket trading after the company said late-June buying shifted toward servers, storage and memory rather than software and services. Software stocks were already under pressure as investors questioned whether enterprise AI spending is being funded by cuts or delays elsewhere, not by fresh budget growth.

IBM released selected preliminary second-quarter 2026 results on July 14, ahead of its scheduled July 22 earnings announcement. Revenue was $17.2 billion, up 1%, while software revenue rose 5%, consulting revenue was flat and infrastructure revenue fell 7%. GAAP diluted earnings per share came in at $2.27, down 2%, while operating EPS was $2.93, up 5%. Gross profit margin slipped to 57.7% on a GAAP basis, and pre-tax income margin was 14.4%. Year to date, IBM generated $7.8 billion in operating cash flow and $4.8 billion in free cash flow.

Arvind Krishna said the weakness came from a shortfall in Z mainframe performance and the related software stack, especially transaction processing, but he also pointed to a bigger customer behavior shift. In the final days of June, Krishna said, clients moved capital spending toward supply-constrained infrastructure purchases ahead of expected price increases, and IBM had not anticipated the scale of that reprioritization. He said a number of large deals failed to close on time because IBM did not adjust quickly enough.

The iShares Expanded Tech-Software Sector ETF dropped more than 4%. Microsoft, ServiceNow, Salesforce and Intuit were also down between 3% and 5%. IG Group analyst Chris Beauchamp called it an “ugly moment” for IBM and software stocks, warning that if the shift toward infrastructure and cybersecurity spending lasts more than a few months, it could revive doubts about software valuations.

Red Hat revenue growth accelerated sequentially to 11%, recent acquisitions including HashiCorp and Confluent performed strongly, and Distributed Infrastructure posted its best performance in reported history, up 37%, with about $500 million of backlog exiting the quarter.