(Bloomberg) -- International Business Machines Corp.'s warning this week that its sales are falling well short of expectations highlights a growing divide between artificial intelligence winners and everyone else in the tech universe.
On Tuesday, IBM said it failed to predict that its customers would shift their spending away from the company's products so they can focus on servers, storage and memory products used in AI computing. The company's shares plunged 25% for their worst day ever in data going back to the 1960s. But in a much broader sense, the revelation explained how the current technology trade is throwing a wrench into the stock prices of huge companies that provide popular products and services unrelated to AI.
"It's not just a wrench, it's like a hammer," said Brian Mulberry, chief market strategist at Zacks Investment Management. "It's not that there's not demand for [other services]. There is. It's just that they can't get there because there's only a finite amount of capex that can be spent."
Perhaps the best examples of this bifurcation are software giants Salesforce Inc. and ServiceNow Inc., which sell tools that manage sales, human resources and IT functions for companies. The stocks have lost roughly a third of their value this year and are among the 20 worst performers in the S&P 500 Index. Meanwhile, the Philadelphia Stock Exchange Semiconductor Index is up 68% in 2026 and on track for its best year since 2009, even though it has tumbled 19% since setting a record on June 22 as investors become concerned about how much more the stocks can run.
That's why IBM's news marked "a pivotal moment in the tech trade," Mulberry said. It underscored how companies are deemphasizing traditional tech products and services and prioritizing AI-related infrastructure and security software, which is in demand because the existence of AI represents a risk to corporate security. With those costs rising — particularly soaring memory prices — the businesses are being forced to reassess how much they can spend elsewhere.
Software developers like Workday Inc. and SAP SE are also likely to feel the pinch from the spending shift, according to Bloomberg Intelligence analyst Anurag Rana. And leading tech business indicators like cloud backlogs and new subscription sales may come in below Wall Street expectations as these companies report earnings in the coming weeks. ServiceNow's results are scheduled to hit on Wednesday.
"While the shortfall may be because of shifting IT budgets, this fundamental weakness will likely be interpreted as AI disrupting their core businesses, which could put further pressure on the sector's valuation," Rana wrote in a note on July 14.
Wall Street has been lowering its estimates for the software and services sector, which is is expected to post earnings growth of 16.5% in 2027, a consensus that has steadily declined for seven straight weeks, according to Bloomberg Intelligence. An index of software-as-a-service stocks is down 27% this year, compared with an 11% drop for a broader software index and a 15% rise in the tech-heavy Nasdaq 100 Index.
Software stocks were already suffering because of AI, based on the assumption that offerings from companies like Anthropic and OpenAI will eventually replace what they sell. For example, Starbucks Corp. is using AI to develop some in-house tools it could use to replace applications it buys from companies like IBM and Microsoft Corp.
Skyrocketing costs for memory are perhaps the most significant risk facing the AI outsiders, whose customers are being forced to spend for more than they expected for this key component of AI infrastructure. Demand has so dramatically outstripped supply for companies like Micron Technology Inc. and Sandisk Corp. that prices for their components have gone through the roof, along with their stocks. As a result, companies investing in AI infrastructure are facing higher costs, which is putting pressure on other areas of their budgets.
"This feels like the culmination of a lot of trends, but we don't know if other companies are seeing the same impact," said Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management. "If others are seeing the same impact, then we can assume that a lot of companies will see weaker revenue growth, and that profits will be impacted tremendously."
The bright spot in software is cybersecurity, where the stocks are benefiting from concerns about the use of AI in hacking attempts. An index of cybersecurity shares has jumped 46% this year and hit an all-time high on Tuesday.
"The market is now thinking about winners and losers more, rather than stroking a broad paint brush on all of software," said Sara Araghi, senior vice president and portfolio manager for Franklin Equity.
Of course, beaten-down stock prices can give investors a chance to buy their favored software shares relatively cheaply. The software-as-a-service index is trading at 15 times earnings over the next 12 months, near its lowest ever and at an extreme discount to its 10-year average of 53.
Still, many Wall Street pros remain cautious in light of the troubling sentiment surrounding the sector and fear it's too early to wade in and buy.
"The software group is akin to swimming where you know that there's piranhas, you just don't know where, and you think you have protection because you've done the work," said Eric Clark, chief investment officer at Accuvest Global Advisors. The stocks need an "'aha!' quarter that shows the world where the great businesses are headed. Or they just get so cheap that you have such a margin of safety from intrinsic value that you're willing to step in."
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--With assistance from Subrat Patnaik and David Watkins.