IBM has delivered one of the clearest warnings yet that the artificial intelligence investment boom is reshaping corporate technology spending, saying customers are diverting billions of dollars from software projects to secure scarce AI infrastructure.

The warning sent its shares tumbling and rattled the broader software sector.

The technology giant said it had “faltered” in keeping pace with the rapid shift in enterprise spending toward AI infrastructure, forecasting weaker-than-expected second-quarter revenue and earnings after large customers redirected capital expenditure to servers, storage systems, networking equipment and memory chips.

The warning wiped about 25% off IBM’s share price on Tuesday, putting the stock on track for its worst single-day decline since the 1987 Black Monday market crash. At those levels, the company was poised to lose roughly $70 billion in market value from its capitalization of $272.8 billion, while the sell-off spread across the enterprise software sector.

Shares of Microsoft, ServiceNow, Salesforce and Intuit all fell between 2% and 5% as investors reassessed whether the AI investment cycle is cannibalizing spending on traditional enterprise software.

IBM Chief Executive Arvind Krishna said the spending shift accelerated unexpectedly during the final weeks of June as customers rushed to secure hardware before anticipated price increases and ongoing supply shortages.

“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 said in a letter to investors.

“While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization.”

Krishna added that numerous large customer contracts expected to close before the end of the quarter were delayed as companies redirected budgets toward AI infrastructure purchases.

The comments suggest enterprises are making difficult trade-offs rather than simply increasing overall technology spending. Instead of expanding IT budgets across all categories, many organizations are postponing software upgrades and consulting projects to ensure they secure access to scarce AI computing resources.

IBM’s warning provides another indication that the AI boom has entered a new stage. During the early phase of generative AI, software companies benefited from enthusiasm surrounding AI-powered applications and productivity tools. Now, however, investment appears increasingly concentrated on the physical infrastructure required to train and deploy AI models.

Cloud providers, governments, and enterprises are investing hundreds of billions of dollars in graphics processors, high-bandwidth memory, advanced networking equipment, storage systems, and data centers. With supply still constrained, companies are prioritizing securing hardware even if it means delaying spending elsewhere.

Recent earnings from companies across the semiconductor supply chain have reinforced that trend. TSMC, ASML, Samsung Electronics and SK Hynix have all reported exceptionally strong demand driven by AI infrastructure expansion, while hardware suppliers continue to announce capacity increases to meet customer orders extending well into the coming years.

IBM’s results suggest those gains are increasingly coming at the expense of parts of the enterprise software market.

Mainframe Business Bears The Brunt

IBM said the weakness was concentrated in its mainframe division, which supplies high-performance computing systems used by banks, airlines, insurers and governments to process millions of daily transactions. The company has spent years attempting to reduce its dependence on the cyclical mainframe business by expanding higher-margin software offerings, particularly through Red Hat following its $34 billion acquisition in 2019.

However, even those efforts were insufficient to offset customers’ sudden reallocation of spending toward AI infrastructure.

The warning indicates that even large enterprises with mission-critical IT systems are delaying software purchases while prioritizing investments viewed as essential for competing in the AI era.

While software spending generally weakened, IBM said cybersecurity remained a priority as businesses respond to increasingly sophisticated AI-powered cyber threats. The company pointed to growing concerns following advances in AI systems capable of identifying software vulnerabilities and exposing weaknesses in existing security infrastructure.

Organizations are therefore continuing to allocate capital toward cybersecurity even while delaying other software investments, making security one of the few segments of enterprise technology that continues to attract strong spending alongside AI infrastructure.

IBM forecast second-quarter revenue of approximately $17.2 billion, representing annual growth of just 1% and falling short of analysts’ consensus estimate of $17.86 billion, according to LSEG.

If realized, the performance would mark the company’s weakest revenue growth in more than a year.

The company also projected adjusted earnings of $2.93 per share, below Wall Street’s expectation of $3.02 per share.

The disappointing outlook amplified investor concerns that IBM’s business transformation remains vulnerable to shifts in enterprise technology spending.

Analysts said IBM’s warning could signal broader challenges across enterprise software.

“This is an ugly moment for IBM and software stocks,” said Chris Beauchamp, chief market analyst at IG Group.

“The big question will be how long the shift to infrastructure and cybersecurity lasts. A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.”

The concern extends beyond cyclical spending patterns. Software companies are simultaneously confronting two structural pressures: customers are reallocating budgets toward AI infrastructure, while AI itself is beginning to automate software development, coding, and other enterprise workflows.

That combination has raised questions about how quickly software vendors can generate returns from their own AI investments.

Betting on Quantum Computing

Seeking to reassure investors, IBM highlighted its longer-term strategy centered on quantum computing, where it has committed more than $10 billion toward building the first large-scale commercial quantum computer by 2029.

Interest in quantum computing has increased following U.S. government efforts announced in May to strengthen domestic quantum technology supply chains, with IBM among the companies expected to play a leading role.

IBM also continues expanding partnerships in artificial intelligence, including collaborations with OpenAI, as it seeks to position itself in the next generation of enterprise computing.

However, those initiatives remain in their early stages and are not yet generating enough revenue to offset weakness in IBM’s traditional businesses.

IBM’s announcement weighs heavily because it offers one of the first concrete examples of how the AI infrastructure race is reshaping enterprise technology spending. Rather than lifting all segments of the industry equally, the boom is creating clear winners and losers.

Semiconductor manufacturers, equipment makers, memory suppliers and data center operators continue to benefit from record demand as organizations race to build AI capabilities. Meanwhile, parts of the software industry now face the prospect that customers will defer upgrades and new deployments until the current infrastructure buildout stabilizes.

Oil prices edged higher in volatile trading on Wednesday after the United States launched another wave of military strikes against Iran and reinstated a naval blockade of Iranian ports, reigniting concerns over crude supplies from the Middle East.

U.S. West Texas Intermediate crude for August delivery rose 0.45% to $79.70 a barrel, while Brent crude for September delivery gained 0.68% to $85.31 a barrel as investors weighed the growing geopolitical risk premium against softer-than-expected U.S. inflation data.

The latest advance followed a significant escalation in the conflict after U.S. Central Command (CENTCOM) said American forces carried out a seven-hour operation targeting dozens of Iranian military sites near the Strait of Hormuz and along the country’s southern coastline.

According to CENTCOM, the operation involved fighter aircraft, naval vessels and unmanned aerial systems that struck missile launch sites, drone facilities, naval assets and coastal defense infrastructure used by Iran to threaten commercial shipping.

The strikes came hours after Washington reinstated a naval blockade covering vessels traveling to and from Iranian ports, marking a renewed effort to restrict Tehran’s maritime operations after the collapse of last month’s interim ceasefire agreement.

CENTCOM Commander General Brad Cooper said Iran had deliberately targeted civilian shipping during the previous week, attacking seven commercial vessels and leaving about a dozen crew members dead, injured, or missing.

The latest military developments have significantly reduced expectations that normal shipping through the Strait of Hormuz will resume anytime soon.

“The latest escalation shows how expectations of a rapid opening of the Strait were premature,” said Saul Kavonic, senior energy analyst at MST Marquee.

“The hostilities and reimposed blockade set the conflict back on an escalatory trajectory.”

Kavonic warned that crude prices could revisit $100 per barrel if current military operations continue for several weeks, with the risk of substantially higher prices should attacks spread to oil production facilities or export infrastructure across the Gulf.

The renewed conflict is once again shifting the market’s focus from physical supply balances toward geopolitical risk.

Although some Gulf producers have partially restored exports through alternative routes, the Strait of Hormuz remains the world’s most strategically important oil chokepoint, carrying a significant share of global crude oil and liquefied natural gas shipments. Any prolonged disruption increases transportation costs, tightens physical supplies, and raises insurance premiums for tanker operators.

The military escalation also complicates the inflation outlook for central banks.

Higher energy prices threaten to offset recent progress in reducing inflation, particularly if sustained increases in crude prices begin feeding through to gasoline, diesel, transportation, and manufacturing costs.

Treasury Yields Declined

Those concerns come just one day after U.S. inflation data surprised markets on the downside.

Consumer prices rose 3.5% year over year in June, while the headline Consumer Price Index fell 0.4% on a monthly basis, marking the first monthly decline since April 2020 as energy prices eased during the survey period.

The softer inflation report prompted investors to scale back expectations for another near-term Federal Reserve rate increase.

Treasury yields fell sharply following the data, with the two-year Treasury yield dropping about nine basis points from a 16-month high as traders reassessed the outlook for monetary policy.

“The market was building a conviction that the Fed was going to hike in September and it’s certainly injected a bit of doubt into that now,” said Chris Turner, head of global markets at ING.

He cautioned, however, that policymakers would likely require additional evidence of moderating inflation before abandoning the possibility of further tightening later this year.

“Short-term, these Fed tightening expectations are going to hang around a bit, so I think the dollar can stay stable, depending on what happens with energy prices,” Turner said.

Federal Reserve Chair Kevin Warsh amplified that message during testimony before the House Financial Services Committee, saying the central bank has “no tolerance” for persistently elevated inflation and would remain committed to maintaining price stability despite political pressure.

Markets are now pricing roughly a 65% probability of a September rate increase, while expectations for an increase later this month have largely disappeared.

Dollar Remained Steady

The evolving interest-rate outlook kept the U.S. dollar broadly steady on Wednesday after its largest daily decline in nearly two weeks.

The dollar index, which measures the U.S. currency against six major peers, held around 100.9, while the euro rose 0.1% to $1.1428 and sterling gained a similar amount to $1.3406. Against the Japanese yen, the dollar traded at 162.24.

Currency markets also reacted to slowing economic momentum in China after second-quarter growth slowed to 4.3%, its weakest pace in more than three years. The weaker growth figures strengthened expectations that Beijing could introduce additional fiscal and monetary stimulus to support economic activity.

Gold Fell Again

Meanwhile, precious metals retreated as rising oil prices revived inflation concerns.

Spot gold fell 0.7% to $4,027.49 per ounce after briefly climbing above $4,100 following Tuesday’s softer U.S. inflation report. U.S. gold futures for August delivery declined 0.9% to $4,034.

Analysts said the rebound in oil prices has quickly altered market sentiment by increasing the likelihood that inflation could remain elevated even as broader price pressures begin easing.

“Higher U.S. crude, gasoline and diesel prices will result in high inflation numbers in the next print in August, that could keep the tone of some Fed officials on the hawkish side, which is not helping gold,” UBS analyst Giovanni Staunovo said.

“In the near term, oil and U.S. gasoline prices will continue to influence gold, as they remain key drivers of U.S. inflation.”

Investors are now turning their attention to the U.S. Producer Price Index, which is expected to provide additional insight into pipeline inflation pressures and help determine whether Tuesday’s softer consumer inflation reading represents the beginning of a broader disinflation trend or merely a temporary pause before higher energy prices feed back into the economy.