This week, the sales warning issued by tech giant IBM, which fell far short of expectations, sent shockwaves through the capital markets, clearly revealing the widening chasm between the winners in the artificial intelligence space and the rest of the technology sector. The company’s shares plunged 25% on Tuesday, marking their largest single-day drop since the 1960s. At the heart of the warning was IBM’s failure to anticipate that its customers would sharply reduce spending on other IT products in order to concentrate resources on AI-related infrastructure, such as servers, storage, and memory products.
The event has been interpreted by the market as a microcosm of the current trading logic, whereby companies are reallocating their limited capital expenditure budgets, thus punishing the share prices of large companies whose businesses are not centered on AI hotspots. Brian Mulberry, Chief Market Strategist at Zacks Investment Management, described the event as “a hammer blow,” noting that it is not that there is no demand for traditional IT services, but rather that under the squeeze of AI spending, companies cannot afford to cover both. This divergence is particularly evident in software giants Salesforce and ServiceNow, both of which provide enterprise sales, human resources, and IT management tools; their market capitalizations have shrunk by about one-third this year, making them among the worst performers in the S&P 500 index. In stark contrast, the Philadelphia Semiconductor Index, despite a recent pullback, is still up 68% for the year.
Mulberry believes that IBM’s message marks “a pivotal moment for tech trade.” Enterprises are prioritizing the development of AI infrastructure and security software, the latter being favored due to the new security risks brought about by AI. However, soaring costs for storage chips and other AI-related expenditures are forcing companies to reassess their spending in other areas.
The data corroborates this trend: earnings growth expectations for the software and services sector for 2027 have been downgraded for seven consecutive weeks, with a SaaS stock index falling 27% for the year while the Nasdaq 100 is up 15%. Concerns about AI substitution have long hung over software stocks; for instance, Starbucks is leveraging AI to develop internal tools to replace applications purchased from IBM and Microsoft. Nonetheless, cybersecurity is an exception; benefiting from concerns about AI being used in cyberattacks, the sector index has surged 46% this year and hit new highs. Although the SaaS index is now trading near historical lows in terms of valuation, most Wall Street professionals remain cautious, believing that now may be premature to bottom-fish and are waiting for “stunning” quarterly results that could revive confidence.
