IBM shares are poised to suffer one of their worst-ever trading days after the tech giant warned customers were diverting spending away from software and into AI infrastructure.

The warning wiped more than $50bn (£37bn) from IBM’s market value, sending the stock down more than 20 per cent and putting it on course for its biggest selloff since the 1987 market crash.

The stock slide dragged the Dow Jones lower as investors questioned whether the AI spending boom was beginning to hurt parts of the software sector.

“This is an ugly moment for IBM and software stocks,” said Chris Beauchamp, chief market analyst at IG.

“The big question will be how long the shift to infrastructure and cybersecurity lasts. A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.”

IBM said it expects second-quarter revenue of $17.2bn and adjusted earnings of $2.93 a share, both below Wall Street forecasts.

Chief executive Arvind Krishna admitted the company had failed to react quickly enough after customers unexpectedly redirected budgets towards servers, storage and memory needed to power artificial intelligence systems.

“These conditions require our teams to execute perfectly, and this quarter we faltered,” Krishna wrote in a letter to investors.

“In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage and memory purchases.”

Krishna said the company had expected some disruption from supply chain pressures but “did not anticipate the magnitude” of the shift.

He added that several large software deals slipped beyond the quarter after businesses reprioritised spending.

AI investment shifts to hardware

While chipmakers and memory manufacturers such as Micron and SK Hynix have benefited from surging demand for AI hardware, software companies face questions over whether customers are delaying spending to fund the underlying infrastructure.

David Morrison, senior market analyst at Trade Nation, said: “IBM suddenly lurched lower this afternoon, taking the Dow down with it, after ‘Big Blue’ issued a profits warning.”

As Emarketer analyst Jacob Bourne said: “IBM got hit with a triple whammy. The AI buildout is concentrating capex in hardware like memory chips and diverting spend from software and services. Markets are going to punish legacy players showing signs of losing ground in the AI race.”

The company’s update also surprised investors because IBM rarely issues preliminary results ahead of scheduled earnings. Its full quarterly figures had been due next week.

“The headline figures do not explain a reaction this extreme for a company of this size”, said analysts at XTB. “The key to understanding the market’s reaction lies in the CEO’s comments about capex.”

They added that if IBM was experiencing meaningful pressure from customers prioritising memory and AI infrastructure spending, investors were likely to assume rivals faced similar challenges.

The sell-off comes after months of strong gains for IBM shares, driven by optimism over its AI and quantum computing businesses. Before Tuesday’s collapse, the stock had climbed from around $215 in May to almost $300.

It also follows pressures on IBM earlier this year after Anthropic launched new AI tools capable of modernising legacy software, which trtiggered investor concerns about the long-term outlook for one of IBM’s historic businesses.

Analysts at Jefferies, however, argued at the time that IBM’s future growth depended far more on AI software, cloud computing and automation than its legacy mainframe operations.