Is IBM's "bombshell" just the beginning? Bernstein: Major shift in industry budgets as funds are accelerating their exit from traditional IT

IBM issued an early earnings warning for Q2 2026, with revenue and earnings per share both significantly below market expectations, triggered by an unexpected collapse in mainframe demand.

The latest Chief Information Officer (CIO) survey released by Bernstein shows that this shock is not an isolated incident, but a concentrated reflection of a structural trend—corporate IT budgets are accelerating their shift towards generative AI and cybersecurity.

IBM's preliminary Q2 revenue was reported at $17.2 billion, about 4% lower than both Bernstein's estimate of $17.961 billion and the market consensus of $17.858 billion; preliminary non-GAAP earnings per share reached $2.93, also missing Bernstein's forecast of $3.09 and the market consensus of $3.03.

In its letter to investors, IBM attributed the poor performance to a shift in customer procurement patterns—companies are moving budgets forward to purchase supply-constrained infrastructure such as servers, storage, and memory, in an attempt to avoid anticipated price increases. However, data from Bernstein's CIO survey points towards a more troubling long-term trend:

In the May 2026 survey, 33% of CIOs plan to cut mainframe MIPS capacity in the next five years, a substantial increase from 23% in November 2025. At the same time, the proportion planning a complete migration off mainframe platforms has risen to 14%. This data shows that a strategic retreat from mainframes is accelerating, rather than a mere fluctuation in purchasing rhythms.

IBM’s stock closed at $217.07 on Tuesday and continued to fall by 0.72% intraday on Wednesday; the stock is down 26.7% year-to-date, underperforming the S&P 500 Index by as much as 36.9 percentage points.

Software Business Diverges, Red Hat Remains a Rare Bright Spot

Although overall software business growth disappointed the market, Bernstein believes that the recent software weakness is highly concentrated in certain segments, rather than a sign of broad-based deterioration.

IBM management clarified that the shortfall in software was mainly driven by transaction processing software linked to the underperformance of the Z17 mainframe, rather than the broader software portfolio.

In contrast, Red Hat is still expected to achieve around 11% revenue growth, maintaining a healthy trend. Bernstein therefore characterizes the software shortfall as a cyclical fluctuation in transaction processing business, not a harbinger of a systemic setback for IBM’s hybrid cloud and AI software strategy.

Investors need to differentiate between two fundamentally different trends: first, the contraction in traditional software revenue tied to mainframe sales; second, whether IBM’s core software growth engine still has sustainability.

Consulting Business Stagnates, CIOs Accelerate Shift Towards AI Automation

The consulting business also failed to provide support. IBM’s preliminary Q2 consulting revenue came in at $5.338 billion, remaining flat year-over-year and below both Bernstein’s estimate of $5.508 billion and the market consensus of $5.433 billion.

According to Bernstein’s CIO survey, there is structural pressure behind this stagnation. In the May 2026 survey, a net -15% of CIOs expect to increase their use of third-party IT consulting firms within the year—indicating that opponents outnumber supporters by a significant margin, marking a clear deterioration compared to previous surveys.

The survey also shows that corporate budgets previously allocated to external consulting are now being redirected towards internal AI and large language model (LLM) deployments. The willingness of CIOs to use consulting firms to help develop and deploy AI/LLM has also declined in recent surveys, further shrinking demand for IBM’s consulting business.

CIO Spending Intentions Hit Survey Low, Pressure May Continue to Spread

Among all negative signals, perhaps the most far-reaching for IBM is the continued deterioration in CIOs’ overall spending intentions.

Bernstein’s May 2026 CIO survey shows that a net 54% of CIOs plan to reduce spending on IBM, the worst figure in survey history and a further decline from a net 49% in November 2025. Among all major hardware vendors tracked by Bernstein, IBM was at the bottom in terms of customer spending intentions.

Bernstein notes that this trend reflects a systematic departure by investors and corporate clients from mainframes, traditional infrastructure, and IT consulting expenditures, with budgets increasingly concentrated on generative AI products and cybersecurity.

Against this backdrop, IBM now faces not only the challenge of recovering quarterly results in the short term, but also a deeper strategic issue: how to redefine its positioning amid rapidly shifting IT budget allocations.

Bernstein currently maintains a "Market Perform" rating on IBM, with a price target of $280, representing about 29% upside from the current price, but warns that further headline risk remains.