IBM’s record stock slide sharpens debate over AI earnings risk
The 25% drop after a modest revenue miss has fed warnings that AI-linked profits may be more fragile than valuations suggest.
By Daniel Okafor · Business Editor
3 min read
IBM’s worst one-day share decline in its 115-year history has intensified scrutiny of whether the AI trade rests on profits that may prove less durable than investors expect. The selloff came as major banks reported exceptional earnings, a contrast that economist Steve Hanke says points to a broader market risk.
Fortune reported that IBM shares fell 25% after preliminary second-quarter results showed revenue of $17.2 billion, below analysts’ consensus of about $17.9 billion. The shortfall was about 3.7%, while adjusted earnings per share of $2.93 also missed expectations of $3.02.
The drop erased roughly $40 billion in market value, according to Fortune. The company was still growing, but its preliminary disclosure indicated revenue growth of 1%, compared with the 5% investors had expected.
IBM’s miss lands in a nervous AI market
IBM Chief Executive Arvind Krishna acknowledged the company’s weaker performance in a letter to investors. He wrote that market conditions required flawless execution and that IBM “faltered,” describing his explanation as “not excuses” but “realities.”
The reaction drew attention beyond IBM. The New York Times’ DealBook asked whether the company’s miss was a warning sign for technology, while Financial Times west coast editor Richard Waters described it as a warning to the IT sector, Fortune reported.
Some analysts treated the decline as evidence that AI could be pressuring older software and consulting models. Goldman Sachs warned that IBM’s results would “fully validate the software bear case scenario,” according to Fortune.
Bank of America and UBS reduced estimates after the plunge, Fortune reported. BofA lowered its price target to $280 from $330 while keeping a Buy rating, and UBS kept its target at $236 while reducing its 2026 earnings-per-share forecast. HSBC downgraded IBM to Reduce.
Hanke points to two kinds of bubbles
Hanke, a Johns Hopkins professor of applied economics and longtime government adviser, told Fortune that markets face “two bubbles.” He described one as a traditional valuation bubble, where share prices rise too far relative to earnings.
Hanke said the more serious risk may sit inside earnings themselves. In that view, profits can be inflated by credit conditions, investment cycles and AI spending, making market valuations look less stretched than they would if earnings later fall.
BCA Research’s Peter Berezin has made a similar argument, saying the AI trade is “primarily an earnings bubble rather than a valuation bubble,” according to Fortune. Berezin has compared the pattern with past boom-bust sectors, including banks before 2008, pandemic-era work-from-home stocks and cyclical industries such as natural resources, airlines and semiconductors.
Berezin has also warned that earnings bubbles are difficult to spot in advance because analysts often cut estimates only after share prices have already dropped. Fortune reported that IBM’s post-selloff estimate cuts fit that pattern.
Bank profits add to the debate
The same day IBM plunged, JPMorgan reported net income of $21.2 billion, the highest quarterly profit for any U.S. bank, according to Reuters. Goldman Sachs reported an 84% rise in earnings attributable to common shareholders to $6.4 billion, with revenue up 39% to $20.34 billion, according to Yahoo Finance.
Hanke told Fortune that strong bank earnings underscored his view that private-bank credit, rather than the Federal Reserve alone, is helping fuel both asset prices and earnings strength. He said markets are “getting mugged by reality.”
JPMorgan CEO Jamie Dimon also cautioned about market conditions after the bank’s results, saying earnings were “close to as good as it gets” while warning about excessive “exuberance,” Fortune reported.
Fortune reported that IBM shares were down 2% in intraday trading after the record decline. The rest of earnings season may show whether investors view IBM as an isolated case or as an early sign of lower tolerance for AI-related earnings disappointments.
This story draws on original reporting from Fortune.