IBM lost a fifth of its value before the market even opened, because its customers spent the money somewhere else.
The company warned on Tuesday that its quarter came in light…
Revenue of $17.2 billion against the $17.9 billion Wall Street had pencilled in.
Adjusted earnings of $2.93 a share against $3.01 expected.
Its infrastructure arm, the division that sells the big machines banks and retailers run their operations on, is now expected to shrink 7% this year. IBM had previously told investors it would shrink low single digits.
Shares fell 22% in premarket trading.
The explanation came in a letter from CEO Arvind Krishna.
In the final few weeks of June, IBM's customers took money they had budgeted for mainframes and software and moved it.
They spent it on AI hardware and memory chips instead, which are in short supply and about to get more expensive.
Buy now before the price goes up. Krishna said IBM had not anticipated "the magnitude of the capex reprioritization."
Because a corporate finance department has one budget… and when it decides it absolutely must have the AI chips, something else gets cut.
In June, the something else was IBM.
Now look at what the banks reported on the very same morning.
Citigroup's profit rose 45%. Goldman Sachs jumped 78%. JPMorgan soared 41%, though a chunk of that came from a one-time gain on its Visa stake. Bank of America climbed 27%. Wells Fargo rose 17%.
Every one of them beat expectations… but the interesting part isn't the headline number…
It's where the money came from.
Goldman's equity trading revenue rose 72% from a year ago. At JPMorgan, stock trading revenue was up 86%. Bank of America's equities trading rose 70%.
Trading revenue, isn't the bank betting its own money. It's the fee the bank collects for handling everyone else's buying and selling.
It doesn't go up because stocks go up, it goes up because people trade MORE.
So on one Tuesday morning in July, the market told you two things at once.
Enormous amounts of money are changing hands… and almost all of it is being placed on one bet.
Which is what I’ve been saying for the past 3 years now… what's carrying this market isn't corporate America getting broadly healthier.
IBM's customers are still there, still buying. They just moved the budget.
The revenue didn't vanish from the economy… instead it relocated to whoever sells memory and accelerators. One company's shortfall is another company's beat, and the money is simply being shuffled from the old line item to the new one.
Meanwhile the banks are collecting a fee on every single shuffle.
That is what a market driven by a trade looks like, rather than a market driven by growth. When the AI trade is what's holding the index up, the index doesn't tell you much about the health of the businesses inside it…
It tells you how confident everyone still is in the trade. And it means the punishment for standing outside that trade is no longer mild.
So the question worth asking about everything in your account this week isn't "is this a good business."
It's "what happens to this business when the money all goes somewhere else."
Oliver
P.S. Goldman's stock trading desk grew faster last quarter than most people's entire portfolios have grown in three years, which should tell you something about who reliably profits from a frenzy.