IBM's 26% Plunge Triggers Software Sector Rout as AI Spending Shift Bites

International Business Machines Corp. suffered its worst single-day trading drop in decades Tuesday after warning that a surge in corporate spending on AI infrastructure had diverted budgets away from its software and mainframe business, sending a shockwave through the software sector.

Shares in the 114-year-old technology company fell as much as 27% in intraday trading before closing down roughly 26%, according to multiple reports. The selloff put the stock on track for an even steeper single-day decline than during the 1987 "Black Monday" crash, wiping out an estimated $70 billion from its market capitalization of $272.78 billion, based on pre-drop levels.

The rout spread across the software industry. Microsoft, ServiceNow, Salesforce and Intuit each fell between 2% and 5%. The iShares Expanded Tech-Software Sector ETF dropped more than 4%, according to a report from India Today.

**Spending Shift Exposed**

IBM's warning came in the form of a preliminary earnings letter to investors, in which CEO Arvind Krishna acknowledged the company had missed a rapid shift in corporate spending priorities. "In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases," Krishna wrote.

"While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritisation," he added, noting that "numerous large deals" had failed to close as expected.

The weakness was concentrated in IBM's mainframe business, which sells high-powered computers and software that process millions of daily transactions for industries such as banking and airlines. The company also pointed to a separate but related trend: businesses were prioritizing cybersecurity spending following recent breakthroughs in AI hacking abilities.

Multiple sources highlighted the role of Anthropic's advanced Mythos model, which has jolted businesses this year with its ability to expose flaws in existing software and encryption systems, pushing companies to ramp up cybersecurity.

**Revenue and Earnings Miss**

IBM said it expects second-quarter revenue to rise just 1% to $17.2 billion, compared with analysts' average estimate of $17.86 billion compiled by LSEG. That would mark the weakest revenue growth in more than a year. The company forecast adjusted earnings per share of $2.93, below the consensus estimate of $3.02.

The results are a stark reversal for a company that has been trying to reduce its reliance on the cyclical mainframe business by focusing on its high-margin Red Hat software unit, which helps firms run applications across different cloud providers.

"This is an ugly moment for IBM and software stocks... the big question will be how long the shift to infrastructure and cybersecurity lasts," said Chris Beauchamp, chief market analyst at IG Group, in comments reported by Reuters. "A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks."

**Quantum Efforts Not Enough**

To reassure investors, IBM on Tuesday highlighted its heavy investments in quantum computing, including more than $10 billion to build the first large-scale quantum computer by 2029. The technology has drawn fresh interest since the U.S. government in May backed companies including IBM to shore up the supply chain, according to the sources.

Krishna also pointed to the company's expanding AI partnerships, including with OpenAI. However, the sources noted that both the quantum efforts and the AI partnerships are still in early stages and are not yet large enough to materially offset weakness in IBM's core software and infrastructure businesses.

The company is expected to report full second-quarter results on July 22.

The warning from IBM underscores a broader anxiety on Wall Street that the boom in spending on servers, chips and networking gear for AI is eating into software budgets, even as AI tools capable of automating routine tasks pose an existential threat to the industry. The NY Post reported that the drop was IBM's worst single-day decline since at least January 3, 1968, according to Bloomberg data.