What Happened?
A number of stocks fell in the afternoon session after IBM issued a second-quarter earnings warning, suggesting that enterprise customers may be slashing software budgets to fund hardware purchases.
Legacy workflow and application incumbents like ServiceNow (NYSE: NOW), Workday (NASDAQ: WDAY), and Salesforce (NYSE: CRM) fell alongside IBM. Conversely, cybersecurity platforms including CrowdStrike (NASDAQ: CRWD), Okta (NASDAQ: OKTA), and Zscaler (NASDAQ: ZS) rallied.
This price action highlights a sharp divergence in how the market treats different software categories under macroeconomic pressure. IBM pre-announced adjusted earnings of $2.93 per share on $17.2 billion in revenue, missing Wall Street estimates of $3.01 and $17.86 billion, respectively. In a letter to investors, CEO Arvind Krishna revealed that the shortfall was driven by a sudden reprioritization of enterprise budgets in late June.
Clients shifted their capital expenditure toward servers, storage, and memory chips to secure supply-constrained hardware ahead of expected price increases, causing "numerous large deals" to stall. The IBM pre-announcement provides evidence for a fear that pressured software multiples all year: the massive capital required to build out artificial intelligence hardware appears to be cannibalizing traditional IT budgets.
When chief information officers are forced to choose between securing scarce memory chips or signing new enterprise workflow contracts, the update suggests hardware might be winning. Because IBM's broad exposure gives it a comprehensive view of enterprise wallets, its warning suggests a headwind for the broader software-as-a-service sector.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks.
Among others, the following stocks were impacted:
- Sales Software company HubSpot (NYSE: HUBS) fell 3.5%. Is now the time to buy HubSpot? Access our full analysis report here, it’s free.
- Finance and Accounting Software company Workday (NASDAQ: WDAY) fell 3.5%. Is now the time to buy Workday? Access our full analysis report here, it’s free.
- Project Management Software company Asana (NYSE: ASAN) fell 3.1%. Is now the time to buy Asana? Access our full analysis report here, it’s free.
Zooming In On Workday (WDAY)
Workday’s shares are very volatile and have had 26 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 1 day ago when the stock gained 4.2% on the news that investors continued to rotate into oversold enterprise software names amid profit taking in chip stocks.
While the Nasdaq retreated and semiconductor leaders like Micron (-4%) sold off, major SaaS incumbents caught a strong bid. ServiceNow (NYSE: NOW) surged 4.3%, and Salesforce (NYSE: CRM) climbed 2.4%. The divergence occurred against a backdrop of rising oil prices and geopolitical tensions in the Middle East that weighed on the broader indices. It seems the AI trade is rotating from the infrastructure layer to the application layer.
After months of paying premium multiples for the chips required to build artificial intelligence, investors appeared to be shifting capital into the software companies that are actually monetizing it. Earlier in 2026, software stocks suffered a severe valuation compression, dubbed the "SaaSpocalypse", driven by fears that AI agents would destroy traditional per-seat software licensing models. Recent data points, including ServiceNow raising its Now Assist AI contract target to $1.5 billion and Salesforce scaling its Agentforce platform, revealed that incumbents can sell AI as a premium add-on rather than watching it cannibalize their core business.
Because enterprise SaaS providers own the proprietary data and daily workflows, they are positioned as the control layer for AI deployment. With semiconductor valuations stretched to historic premiums, capital continued to hunt for the margin of safety found in quality software stocks with depressed forward multiples. However, risks remain: if macroeconomic pressures force enterprise CIOs to consolidate vendors further, second-tier software names without clear AI monetization could still struggle.
Workday is down 32.2% since the beginning of the year, and at $139.60 per share, it is trading 43.6% below its 52-week high of $247.69 from September 2025. Investors who bought $1,000 worth of Workday’s shares 5 years ago would now be looking at only $601.62.
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