Software stocks slide on enterprise spending concerns 🚩 Microsoft drops 3%

Software and consulting stocks are selling off sharply after IBM released preliminary second-quarter results that missed expectations on both revenue and earnings. More importantly, IBM highlighted a noticeable shift in enterprise customer behavior, which investors interpreted as a potential warning sign for the broader enterprise software market.

The biggest decliners include:

• IBM: more than -20%
• Accenture: around -8%
• Cognizant: around -7%
• ServiceNow: around -7%
• Salesforce: around -5%
• Workday: around -5%
• Adobe, HubSpot, Datadog, and Microsoft: more than -3%

Companies are shifting spending from software to AI infrastructure

Beyond the disappointing financial results, the market focused primarily on comments from IBM CEO Arvind Krishna regarding customer behavior toward the end of June. According to IBM, many enterprise customers have begun redirecting IT budgets away from software, traditional IT services, and digital transformation projects toward servers, storage systems, and memory chips in an effort to secure critical hardware before prices rise even further.

The main driver behind this trend is the ongoing global shortage of HBM and DRAM memory. Massive demand from hyperscalers and AI infrastructure investments continues to push up prices for key data center components. As a result, enterprises are allocating a growing share of their IT budgets to hardware purchases, leaving less capital available for software licenses, SaaS subscriptions, consulting services, and new software deployments.

The market fears a broader slowdown across enterprise software

For investors, the key concern is that this issue may extend well beyond IBM. If enterprises continue reallocating capital from software toward AI infrastructure, software and consulting companies could face slower revenue growth over the coming quarters.

These concerns have found fertile ground because investors were already worried that AI could eventually reduce demand for traditional enterprise software and consulting services, creating longer-term headwinds for many companies in the sector. IBM also pointed to rapidly increasing cybersecurity threats, which further diverted customers' attention from executing some IT projects during the final weeks of the quarter.

Microsoft shares (D1 timeframe)

Microsoft shares have fallen roughly 7% below their 200-day EMA (red line) and are now down nearly 30% from their all-time highs. The company has endured a challenging start to the year. After rebounding by around 10%, the RSI has recovered to 51, indicating a neutral technical position from which the stock could theoretically experience either a strong bullish or bearish move.

Source: xStation5

Microsoft shares are now down approximately 20% year-to-date, making the company one of the weakest performers among Wall Street's mega-cap technology stocks despite a significant year-over-year improvement in its financial results. With a P/E ratio of around 23, the valuation is not particularly demanding relative to the Nasdaq average. However, investors remain concerned about the company's massive AI-related capital expenditures, its exposure to a potentially slowing enterprise software cycle, and its substantial investment in OpenAI, which competes directly with other leading AI developers, including Anthropic.

Source: xStation5