Software stocks drop and chip stocks rally after IBM indicates that ramped-up client purchases of hardware mean less money to buy software

IBM's preliminary earnings results were bringing down the wider software sector on Tuesday while boosting stocks of companies that make hardware like chips and data storage.

Artificial intelligence may have already taken a bite out of software this year, but a profit warning from IBM indicates that it's hardware's turn to chow down.

As companies with software-as-a-service offerings struggle to fend off worries that AI will render their business models obsolete, investors have been piling into stocks of companies that make the hardware that is powering the tech transformation.

A disappointing preliminary earnings report from International Business Machines on Tuesday seemed to solidify that trend.

The stock $(IBM)$ plunged 25.2% on Tuesday, a one-day record, after the company reported second-quarter profit and revenue that were well below expectations. That decline broke the previous record of a 23.7% fall suffered on Oct. 19, 1987, the day known on Wall Street as "Black Monday."

Although the company had been anticipating some supply-chain-related headwinds, according to IBM CEO Arvind Krishna in his letter to shareholders, it underestimated just how much of quarterly capital expenditures customers would put toward scarce hardware like servers and storage and memory chips that are undergoing price increases, and not toward associated software.

Memory-chip shortages caused by surging AI demand have prompted companies to raise prices for those components.

The wider software sector took a hit after IBM's announcement, with ServiceNow's stock (NOW) shedding 5.8%, Workday shares (WDAY) falling 3.5%, shares of SAP $(SAP)$ off 3.2% and Salesforce's stock (CRM) losing 2.1%.

Morningstar analyst Luke Yang told MarketWatch that hardware "eating everyone's lunch" is a key theme in the market now.

"[There's a] lot of money flowing to hardware companies, and there isn't much left for other verticals," he said.

Susquehanna analyst James Friedman said the increase in allocation of tech budgets toward hardware is "crowding out" spending in other areas of tech.

"If you look at a technology budget in the Fortune 500 or Fortune 1000, there's a finite amount of dollars," Friedman told MarketWatch.

The reason infrastructure and hardware are such a priority for those companies - many of which are IBM's clients - is because of the perception that it's "cheaper to buy it today than tomorrow," he said.

As for IBM, the company "see[s] their customers buying or increasing their allocations toward things like memory and parts of hardware infrastructure that are different than what they sell," Friedman said.

IBM reported preliminary second-quarter revenue of $17.2 billion, which was up just 1% and short of expectations for $17.86 billion, according to analysts tracked by FactSet. The company's adjusted earnings of $2.93 per share also fell short of the FactSet consensus for $3.01.

Now read: IBM's stock dives toward worst day in nearly 40 years after the surprise release of an earnings miss

Krishna said the launch of the company's z17 mainframe and the associated software stack in the second quarter ended up being "worse than our expectations" for infrastructure revenue to fall in the low-single-digit range. However, Morningstar's Yang explained that mainframes fall into a different class of hardware and process different workloads than hyperscaler servers do, for instance.

Jefferies equities trading analyst Jeffrey Favuzza said he believed investors were focused on whether IBM's preliminary results are "a harbinger of what we are braced for" with ServiceNow's and SAP's results set for next week.

Meanwhile, memory and storage stocks were climbing Tuesday following Monday's steep declines.

Sandisk's stock $(SNDK)$ rose 5%, while Micron Technology's stock $(MU)$ climbed 4.9%. Storage makers Seagate Technology $(STX)$ and Western Digital $(WDC)$ saw shares rise 2.1% and 1.4%, respectively.

Among chip makers, Intel's stock $(INTC)$ rose 4.7%, Advanced Micro Devices' stock $(AMD)$ gained 2.6% and Marvell Technology shares $(MRVL)$ closed up 2.3%. Nvidia's stock (NVDA) surged 4.1%, while Broadcom's stock $(AVGO)$ tacked on 1.3%.

Favuzza said "wow" earnings next week from hardware companies Intel and Texas Instruments $(TXN)$, compared with what could be "more muted reactions" to reports from software companies SAP and ServiceNow, would support his idea that "the place to continue to be is within semis."

The PHLX Semiconductor Index SOX has soared 78.8% in 2026, while the iShares Expanded Tech-Software Sector exchange-traded fund IGV has dropped 11.4%.

-Britney Nguyen -Hannah Pedone

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July 14, 2026 17:10 ET (21:10 GMT)

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