This earnings season, more than any other, will sort the winners from the losers -- but it's going to be a volatile process.

Two sentences in a shareholder letter from IBM's CEO caused mayhem in the tech sector Tuesday.

Clients are shifting capex spending toward servers, storage, and memory ahead of expected price increases, Arvind Krishna wrote Tuesday, alongside preliminary results. They were also "distracted" by rapidly evolving cybersecurity concerns in the quarter.

Investors didn't think twice. The U.S. market's shiny, new memory-chip maker SK Hynix jumped 27%; server maker Dell climbed 7%; and storage play Sandisk rose 5%. Cybersecurity stocks also surged. In contrast, IBM slumped 25% on its worst ever day and software names such as Adobe, ServiceNow, and Oracle had another tough day.

The great tech divide is widening, and the gap between the haves and the have-nots is looking like a chasm.

In the game of acronyms, it's better to be an ASML than an IBM. The Dutch chipmaking equipment company rose early Wednesday after its second-quarter earnings. Order intake remained "extremely strong," CEO Christophe Fouquet said.

As long as you're into semiconductors you'll be fine. If you design, manufacture, and sell chip equipment, like Aehr Test Systems, you'll be great. The stock was up 30% ahead of the open Wednesday after its earnings.

It's good for the broader market, too. The information technology sector was the S&P 500's best performer Tuesday, while the equal-weighted S&P 500 actually fell.

But the reaction to IBM comes with a warning for investors. Should a handful of words from IBM, reaffirming well-established trends, spark such moves?

It looks like volatile, knee-jerk reactions may end up being a feature of this earnings season as the stock market struggles to value tech stocks in the AI era.

-- Callum Keown

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IBM's Earnings Warning Gave Its Stock Worst Day Ever

IBM shows how challenging it is for software makers when companies are shifting their spending priorities toward hardware like memory and servers to get ahead of price increases. Its failure to anticipate just how big a shift there was led to the sharpest one-day drop in its stock ever.

   -- CEO Arvind Krishna explained that second-quarter earnings, which fell 
      short of expectations, were largely driven by the company's 
      infrastructure business. IBM had anticipated revenue to decline by a 
      low-single digit percentage for the year, starting in the second quarter, 
      but it was worse. Shares sank 25%. 
 
   -- Krishna noted that customers abruptly shifted their quarterly budgets 
      toward servers, storage, and memory products at the end of June to beat 
      projected price increases for supply-constrained infrastructure. Although 
      IBM expected some movement, "we did not anticipate the magnitude" of the 
      capex reprioritization, Krishna wrote. 
 
   -- In the face of these sudden changes, the company failed to "adapt and 
      move quickly enough," delaying several major deals past their expected 
      close dates, Krishna continued. "These are not excuses, but they are 
      realities." IBM expects to report $17.2 billion in revenue, behind 
      analysts' calls for $17.9 billion. 
 
   -- The figure includes a 7% drop in infrastructure revenue, a 5% increase in 
      software revenue, and flat consulting revenue. Adjusted earnings are 
      forecast to come in at $2.93 a share, missing analysts' expectations for 
      $3.01. 

What's Next: The company sought to soften the blow by highlighting bright spots like its burgeoning quantum computing division, which remains on track to deliver a fault-tolerant machine by 2029. IBM also pointed to its software business, where revenue tied to its Red Hat platform grew 11% sequentially.

-- Mackenzie Tatananni

PayPal Gets a $53 Billion Takeover Offer, Report Says

Merger mania is back, and investors were weighing up another potential deal on Wednesday. Payments company PayPal has received a takeover offer valuing it at more than $53 billion, according to a report.

   -- Stripe and Advent International have teamed up on a bid that values 
      PayPal at $60.50 per share, Reuters reported, citing people familiar with 
      the matter. Advent declined to comment, and PayPal and Stripe didn't 
      immediately respond to requests for comment from Barron's early on 
      Wednesday. 
 
   -- The $60.50 level represents a 28% premium to where the stock was trading 
      as of Tuesday's close. The shares jumped following the news and they 
      could do with a boost -- they've slumped 35% over the past 12 months and 
      are trading way below the peak of $300 they hit in 2021. 
 
   -- The reported approach wouldn't come as a complete shock -- a similar 
      report about Stripe's potential interest in PayPal came in February. 
      However, Wall Street analysts said at the time that the size of the 
      company and its multiple different operations made the sale of the entire 
      business difficult. 
 
   -- Companies announced $2.6 trillion worth of transactions over the first 
      half of 2026. That was up 58% from a year earlier, although the number of 
      deals was roughly the same -- suggesting companies are focusing on bigger 
      and splashier acquisitions. 

What's Next: Stripe and Advent plan to jointly own PayPal via equal stakes rather than looking to break it up, according to the report. The company announced a reorganization in April to separate its three business segments: checkout, consumer financial services, and payment processing.

-- Adam Clark and George Glover

Big Banks See Deal Boom Time, With Full Pipelines Ahead

Heads of the largest U.S. lenders say their bankers have even more deals lined up after their latest earnings results showed strong growth. It's all thanks to clients' confidence in carrying out big-ticket transactions, driven by strategic mergers in a relaxed regulatory environment.

   -- Goldman Sachs' second quarter investment-banking fees jumped 55% from a 
      year ago to $3.4 billion, including a 130% surge in equity underwriting 
      such as IPOs. CEO David Solomon said the number of deals waiting in the 
      wings is the most in five years and the second-highest level on record. 
 
   -- Rival banks said they were seeing robust pipelines, too. Citigroup's 
      investment-banking revenue rose 44% from a year ago to $1.5 billion, 
      driven by equity- and debt-capital-markets work. CEO Jane Fraser has been 
      hiring experienced bankers from more successful rivals aiming to win 
      bigger assignments. 
 
   -- JPMorgan Chase's finance chief, Jeremy Barnum, said the bank's own 
      pipeline was "quite robust" and that he felt as though "the high-profile 
      nature of the activity this quarter, and just the generally robust 
      environment is itself begetting more activity." 
 
   -- The market has been chock-full of big debuts. SpaceX went public last 
      month as the largest-ever initial public offering. Some two-dozen banks, 
      including Goldman, JPMorgan, and Citi, worked on the deal. Bank of 
      America and Wells Fargo also benefited from a wave of dealmaking 
      activity. 

What's Next: Challenges lie ahead. Citi's Fraser noted that the summer lull could set in as bankers and clients fade away until fall. There is also uncertainty around geopolitical events and the midterm elections. "The wildcard really is geopolitics," she said.

-- Rebecca Ungarino, Andrew Welsch, and Martin Baccardax

Cooling June Inflation Reading Keeps July Rate Hike at Bay

The June inflation numbers proved much cooler than expected, with even non-energy categories posting softer price growth. That all but guarantees the Federal Reserve won't raise rates at the end of the month, but policymakers will still be watching the longer-term trends, especially with the Iran war reheating.

   -- Headline inflation posted a whopping monthly decline of 0.4% in June, 
      sending annual growth down to 3.5%. While that's still significantly 
      higher than the prewar rate of 2.4%, it's much cooler than May's 4.2% 
      headline reading and driven largely by a huge drop in gasoline prices. 
 
   -- Retail gasoline prices fell from $4.40 in mid-May to an average 
      nationwide low of $3.70 a gallon last month, according to data from the 
      Energy Information Administration. That sent the CPI's overall energy 
      index down 5.7% in June -- the largest monthly decline since April 2020. 
 
   -- Last month's numbers weren't disinflation taking hold, suggested Phil 
      Neuhart, the head of market and economic research at First Citizens Bank. 
      With the U.S.-Iran cease-fire unraveling, energy prices are rebounding, 
      he noted. The national average gas price on Tuesday was $3.86 a gallon, 
      AAA said. 
 
   -- But core inflation -- arguably even more important as it strips out the 
      more volatile food and energy components -- was surprisingly flat on the 
      month and posted a 2.6% gain from a year ago. That reversed three 
      straight months of core inflation trending higher. 

What's Next: The benign core reading should provide some comfort for Fed officials worried about inflationary pressures broadening out. Expectations for a July interest rate hike moved dramatically lower, to 15.5%, down from 41.7% the previous day.

-- Megan Leonhardt and Liz Moyer

New York Tells Hyperscalers: Not In My Backyard, For Now

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