AI monster "sucks blood" from traditional software stocks! IBM historic crash, the most brutal budget cleansing in the tech world is unfolding.

Note that IBM's warning this week that its sales were far below expectations highlights the increasing divide between winners in the AI field and other tech companies. On Tuesday, IBM stated that it did not anticipate its customers shifting their spending away from the company's products to focus on servers, storage, and memory products used in AI computing. The company's stock plummeted 25%, marking its largest single-day decline since the 1960s. However, in a broader sense, this disclosure explains how the current market trading logic is severely impacting the stock prices of large companies that offer non-AI related products and services. Zacks Investment Management's Chief Market Strategist Brian Murphy said, "This isn't just a stumble, it's more like a sledgehammer. It's not that there isn't a need for [other services]. The demand is there. It's just that they can't fulfill it because the total amount of capital expenditure that can be spent is limited." Perhaps the best example of this divide is software giants like Salesforce, Inc. and ServiceNow, which sell tools for managing sales, human resources, and IT functions for businesses. These stocks have already shrunk in market value by about one-third this year, making them among the worst-performing 20 stocks in the S&P 500 index. Meanwhile, the Philadelphia Semiconductor Index has risen by 68% in 2026 and is set to achieve its best annual performance since 2009, despite a recent 19% decline since reaching a record high on June 22nd. Murphy emphasized that IBM's news signifies a "critical moment in the tech trade." It underscores how companies are moving away from traditional tech products and services and prioritizing AI-related infrastructure and security software. With rising costs, especially skyrocketing prices for storage chips, companies are forced to reevaluate how much capital they can invest elsewhere. Industry research analyst Anurag Rana noted that software developers like Workday and SAP SE could also feel the pressure of shifting expenditures. As these companies release their financial reports in the coming weeks, leading tech business metrics such as cloud backlog orders and new subscription sales could fall below Wall Street's expectations. ServiceNow's performance is scheduled to be announced on Wednesday. Rana wrote in a briefing on July 14th, "While the shortfall can be attributed to the shift in IT budgets, this fundamental weakness may be interpreted as AI disrupting their core businesses, which could put further pressure on valuations in the industry." Wall Street has been lowering its expectations for the software and services industry, with data showing that the industry is expected to achieve 16.5% profit growth by 2027, a consensus that has steadily declined for seven weeks. A Software as a Service (SaaS) stock index has dropped by 27% this year, while a broader software index has fallen by 11%, and the technology-heavy Nasdaq 100 index has risen by 15%. Software stocks have already been hit by AI, based on the assumption that products from companies like Anthropic and OpenAI will eventually replace what they currently sell. For example, Starbucks Corporation is using AI to develop internal tools that could replace applications they purchase from companies like IBM and Microsoft Corporation. For outsiders to AI, the sharp rise in storage chip costs may pose the biggest risk as their customers are forced to spend unexpectedly high amounts on critical components for AI infrastructure. Companies like Micron and SanDisk are facing such intense demand that their component prices and stock prices are skyrocketing. As a result, companies investing in AI infrastructure are facing higher costs, putting pressure on their budgets in other areas. Paul Nolte, Market Strategist and Senior Wealth Manager at Murphy & Sylvest Wealth Management, said, "This feels like a peak in so many trends, but we don't know if other companies are seeing the same effects," "If others are seeing the same effects, we can assume revenue growth for many companies will slow, and profits will take a huge hit." Tech stocks have rebounded since their April low One bright spot in the software sector is cybersecurity, with stocks benefiting from concerns about hackers using AI in their attempts. A cybersecurity stock index has surged by 46% this year and hit an all-time high on Tuesday. Sarah Aragi, Senior Vice President and Portfolio Manager at Franklin Stocks, said, "The market is now thinking more about winners and losers, rather than lumping all software together." Of course, the battered stock prices can provide investors with an opportunity to buy their favorite software stocks at relatively low prices. The current trading price of the Software as a Service index is 15 times the expected earnings for the next 12 months, close to its all-time low level, significantly discounted from its 10-year average of 53 times. However, given the unsettling sentiment surrounding the industry, many Wall Street professionals remain cautious and are concerned that it may be too early to enter the market now. Eric Clark, Chief Investment Officer at Accuvest Global Advisors, said, "The software sector is like swimming where you know there are piranhas, you just don't know where they are, and you think you're protected because you've done your homework." These stocks need a "Eureka" quarter to show the world where these great companies are heading, or they are just becoming so cheap that you're getting such a large margin of safety from intrinsic value that you're willing to step into them."