IBM plummets to record lows; Goldman warns: AI capital spending shift may confirm a 'software bear market'.

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On Tuesday, IBM issued a surprising second-quarter earnings warning, sending its stock price to the largest single-day drop on record, sparking deep market concerns that corporate IT budgets are shifting en masse toward AI infrastructure and squeezing traditional software and service spending.

During U.S. trading, IBM shares plummeted as much as 26%—a drop surpassing the single-day losses seen during the dot-com bubble burst and the 1987 market crash. According to Bloomberg data going back to 1968, if this decline holds until the close, it would be IBM’s worst trading day on record.

IBM CEO Arvind Krishna blamed the earnings miss on a "sudden shift" in customers' capital expenditure priorities: amid the AI boom and tight supply of servers, storage, and memory, enterprise customers have temporarily redirected large portions of their budgets to snapping up hardware infrastructure, causing several large contracts to not be signed as scheduled.

Goldman Sachs promptly warned that this IBM incident fully confirms the "software bear market scenario" and expects a broad sell-off in the software and services sector.

Core of the Earnings Warning: Both Revenue and Profit Miss, Mainframe Business Takes the Biggest Hit

According to IBM’s preliminary second-quarter data, the company’s total revenue was $17.2 billion, below market expectations of $17.9 billion; Non-GAAP EPS was $2.93, also missing forecasts of $3.02.

By business segment, software revenue grew only 5% year-on-year, significantly below the expected 11% pace; infrastructure revenue declined 7% year-on-year, worse than the expected 3% drop; consulting was flat, missing the expected 2% gain.

UBS analyst Robert Ruple and Goldman’s James Schneider analyzed:

The main driver behind the miss was IBM’s weak mainframe (zSeries) performance, which in turn severely hurt the high-margin Transaction Processing (TP) business.

Transaction Processing revenue is estimated to have dropped by a mid-double-digit percentage year-on-year, and this business accounts for nearly 30% of IBM’s software segment revenue.

By contrast, Red Hat achieved 11% growth at constant exchange rates, and recent acquisitions such as HashiCorp and Confluent performed as expected, but none could offset the sharp decline of the TP business.

IBM management confessed in a letter to shareholders:

"In the final weeks of June, we saw customers shift their quarterly capex toward servers, storage, and memory, aiming to lock in supply-constrained infrastructure ahead of anticipated price increases. While we anticipated some supply chain impact, we did not foresee the extent of this capital expenditure reshuffling."

Goldman Issues "Software Bear Market" Warning, Sector Chain Reaction Emerges

Goldman Sachs made it clear in its initial research report that the IBM event "fully confirms the software bear market scenario" and anticipates "fairly broad" downward pressure across the software and services areas.

Barclays analyst Andrew Keches noted that this update now puts IBM’s investment logic to the test. Previously, management repeatedly emphasized that AI was "additive"—not disruptive—to the software stack, but the earnings miss was concentrated in mainframes and associated Transaction Processing software, with customers diverting spending to supply-constrained servers, storage, and memory, making it hard for the old narrative to persist.

He believes the key debate now is: Is this just a brief misalignment in corporate procurement timelines, or the early sign that system-wide AI infrastructure investment is crowding out traditional software spending?

BNP Paribas analyst Stefan Slowinski also pointed out that IBM has not yet presented any signs of improvement.

As for sector linkage, Andrew Keches believes the most direct potential beneficiaries are server and storage hardware companies like Dell, HP, and, in memory, Micron; while consulting and IT service companies such as ACN and KD—and the software sector as a whole—face greater negative sentiment pressure.

Analysts: IBM Has Company-Specific Factors, Sector-Wide Conclusions Should Be Drawn Cautiously

Despite spreading market concerns, several analysts cautioned against equating IBM's situation with an industry-wide signal.

Andrew Keches specifically stated that IBM has admitted to company-level execution issues, including several major contracts not being completed on time.

He also pointed out that IBM’s decision to pre-announce more than a week before its official earnings release itself suggests the miss may be more of a company-specific issue rather than an industry-wide trend. He wrote:

"We appreciate that it’s a 'sell first, ask questions later' market, but mapping IBM’s results 1:1 onto every software and services company should be done with caution."

Goldman analyst James Schneider also noted that IBM’s Data & Automation software weakness partly stems from internal execution problems, and said he will not update his valuation model until next week's earnings call, when management provides more details on its 2026 guidance and response measures.

UBS analyst Robert Ruple characterized the IBM warning as a possible "leading indicator"—suggesting that other software, IT services, and hardware companies could issue similar warnings through the rest of the Q2 earnings season, cumulatively pressuring overall market sentiment.

Huge Gap in Wall Street Expectations, Ratings System Faces Reevaluation Pressure

Prior to this earnings warning, Wall Street’s expectations for IBM were generally optimistic, sharply contrasting with the day’s market reaction. According to data tracked by Bloomberg, IBM’s average price target over the past 12 months was $300; among 25 covering analysts, 17 rated it a buy, 6 neutral, only 2 recommended selling.

UBS’s David Vogt noted that this result could prompt investors to reassess IBM's long-term software growth prospects, particularly the outlook for 2027 and beyond, as rising infrastructure costs and tightening IT budgets are persistently restraining demand.

He believes that faster-growing businesses like Red Hat may no longer sufficiently offset the sustained weakness in Transaction Processing, and IBM will face more pressure, needing larger-scale acquisitions or other measures to sustain software growth trajectory.

Barclays' Andrew Keches added that on the previous quarterly earnings call, IBM specifically expressed willingness to pursue more acquisitions, citing attractive valuations and a greater-than-normal appetite for deals. While this earnings miss does not directly point to M&A moves, the weak performance undeniably adds uncertainty to the topic.

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