IBM's steepest single-day decline in 37 years sent broad software names lower Tuesday after the company missed earnings and signaled customers are shifting spending toward hardware over traditional software.

The IBM Miss

IBM shares dropped 25% Tuesday—the company's worst single trading day since 1987. The plunge followed Q2 revenue of $17.2 billion, below the consensus forecast of $17.86 billion, and operating earnings per share of $2.93 versus expectations of $3.01. But the real pressure came from forward guidance: customers are reallocating IT budgets away from IBM's software and infrastructure services toward AI hardware and memory chips.

Sector Pressure

The selloff rippled across software names. The Invesco Software ETF (IGV) fell 4% to $89.31. The broad move suggested investor worry that IBM's revenue challenge—customer budgets redirected to infrastructure hardware—could be a warning sign for other enterprise software vendors dependent on the same spending pools.

What This Means

IBM's earnings miss and customer shift toward hardware created a test case for sector resilience. A single large-cap name's guidance change can reset sentiment across its peers. The software ETF decline showed how quickly concerns about enterprise spending priorities can spread—even if the underlying cause remains IBM-specific.