Markets Take a Breather: S&P 500, Nasdaq Pull Back from Record Highs as ServiceNow and IBM Get Hammered

 

 Markets Take a Breather: S&P 500, Nasdaq Pull Back from Record Highs as ServiceNow and IBM Get Hammered

**Subtitle:** *The AI trade hit a speed bump Thursday as two tech giants tumbled on earnings—one caught in the crossfire of the Iran war, the other facing the existential threat of AI eating its own lunch.*

**Reading Time:** 8 Minutes | **Category:** Markets & Economy

## Introduction: The Hangover After the High

Just yesterday, it felt like the stock market could do no wrong.

The S&P 500 surged 1.1% to a record closing high of 7,137.90. The Nasdaq Composite jumped 1.6% to 24,657.57. The Dow added 340 points. Investors were celebrating President Trump's extension of the U.S.-Iran ceasefire, betting that the worst of the geopolitical storm had passed .

Today, the mood is different.

Futures are pointing to a modest pullback Thursday morning, with S&P 500 futures edging down 0.1% and Dow futures falling about 0.4% . The pullback follows a string of earnings reports that have investors asking uncomfortable questions about the sustainability of the AI rally.

Two names are leading the losses: **ServiceNow** and **IBM**.

ServiceNow, the cloud workflow automation giant, tumbled nearly 13% in after-hours trading after revealing that the Iran war is actively hurting its business. The company disclosed that subscription growth took a "75 basis point headwind" because the Middle East conflict delayed several large on-premise deals from closing .

IBM fared little better. The century-old tech icon saw its shares sink 6.5% after reporting slower revenue growth—just 9% compared to 12.2% in the previous quarter—as investors fretted that AI tools are beginning to eat into its core software business .

The juxtaposition is striking. The broader market is at all-time highs, fueled by AI optimism. But the companies that actually have to deliver AI profits are showing cracks. Welcome to the "prove it" phase of the AI trade.

In this deep-dive, we will break down exactly what happened at ServiceNow and IBM, explain why the Iran war is now a corporate earnings story, and help you understand what this means for your portfolio in the days ahead.

## Part 1: The Big Picture – Records Give Way to Reality

### Yesterday's Euphoria

Wednesday was a good day to own stocks. Really good.

The S&P 500 added 73.89 points to close at 7,137.90, marking its best month since 2020 . The Nasdaq surged 397.60 points to 24,657.57. Even the Dow, which has lagged its tech-heavy cousins, managed a 340-point gain .

The catalyst was geopolitical. President Trump announced an indefinite extension of the ceasefire with Iran, posting on Truth Social that the U.S. would hold off on attacking "until such time as their leaders can come up with a unified proposal" .

Investors breathed a sigh of relief. Oil prices, which had spiked above $100, retreated modestly. The "risk-on" trade was back.

### Today's Reality Check

But markets are forward-looking. And what they see Thursday morning is a different picture.

Asian markets were mixed overnight. Japan's Nikkei hit an all-time intraday high of 60,013 before pulling back, while South Korea's Kospi also touched record levels . But the enthusiasm didn't fully translate to U.S. futures.

The modest pullback reflects a classic "buy the rumor, sell the news" dynamic. The ceasefire extension was largely priced in during Wednesday's rally. Now, investors are turning their attention back to fundamentals—and the fundamentals are showing strain.

## Part 2: ServiceNow – Collateral Damage in the Iran War

### The Headlines That Spooked the Market

ServiceNow reported first-quarter earnings after the bell on Wednesday. On the surface, the numbers were fine:

- **Revenue:** $37.7 billion, up 22% year-over-year (beat estimates of $37.4 billion)

- **Adjusted EPS:** $0.97, up from $0.81 a year ago (beat estimates of $0.96)

- **Subscription Revenue:** $36.71 billion, up 22%

- **Current Remaining Performance Obligations (CRPO):** $12.64 billion, beating estimates of $12.56 billion 

So why did the stock crash nearly 13%?

The answer lies in a single sentence buried in the earnings release: Subscription revenue growth faced "approximately 75 basis points of headwinds due to the delayed closing of several large on-premise deals as a result of the Middle East conflict" .

### The "75 Basis Point" Problem

For a company that trades at premium multiples because of its consistent high-growth profile, any growth headwind is a big deal. Seventy-five basis points—three-quarters of a percentage point—might not sound like much. But for a business with $36 billion in subscription revenue, that represents hundreds of millions of dollars in delayed revenue.

Operating Chief Amit Zavery tried to reassure investors, noting that the delayed deals are expected to close later in 2026. "We don't know when these conflicts will be resolved, but we continue to work with these customers," he said .

Finance Chief Gina Mastantuono took a more cautious tone, explaining that the full-year guidance reflects a "conservative assessment" of the current geopolitical environment. "Taking into account the ongoing Middle East conflict and the potential impact on transaction timing, I have indeed adopted a slightly conservative strategy," she said .

### The AI Bright Spot

It wasn't all bad news. ServiceNow's AI product portfolio is outperforming expectations and remains on track to exceed its previously set goal of $1 billion in annual revenue by 2026 .

The company also announced that its board had authorized an additional $5 billion share buyback program, a signal that management believes the stock is undervalued despite the selloff .

And in a move that underscores its AI ambitions, ServiceNow completed its $7.75 billion acquisition of cybersecurity startup Armis ahead of schedule—a deal originally expected to close later in the year .

### Why the Market Overreacted (Or Didn't)

The 13% drop is brutal, but it reflects a real tension. ServiceNow has positioned itself as an "AI control tower"—the central platform that businesses use to manage their AI deployments. That narrative has driven the stock's premium valuation. If geopolitical chaos can disrupt that narrative, even temporarily, the multiple may need to reset.

On the other hand, the company beat on both revenue and earnings, raised its full-year subscription guidance, and is buying back stock aggressively. For long-term investors, the selloff may present an opportunity.

**The Bottom Line on ServiceNow:** The Iran war is now a direct hit to enterprise software earnings. This is not a theoretical risk anymore. It is real. And until the conflict resolves, investors will be nervous about any company with significant exposure to the Middle East.

## Part 3: IBM – When the Disruptor Gets Disrupted

### The COBOL Problem

IBM's story is different from ServiceNow's—and in some ways, more troubling.

The company reported first-quarter revenue of $15.92 billion, up 9% year-over-year . That *beat* analyst expectations of $15.62 billion. Adjusted earnings per share came in at $1.91, also beating the $1.81 estimate .

But the growth rate slowed from 12.2% in the previous quarter. And the software segment—IBM's crown jewel—grew just 11.3%, down from double-digit growth rates in prior periods .

The culprit? AI. Specifically, the fear that AI tools are beginning to automate the very functions that IBM's software has historically served.

Here is the twist that makes this particularly painful for IBM. In February, Anthropic announced that one of its AI tools could help modernize COBOL—the aging programming language that runs on IBM's mainframes .

### The Existential Question

For decades, IBM has made billions by being the company that keeps the world's critical infrastructure running. Banks, airlines, insurance companies—they all run on IBM mainframes running COBOL code written in the 1970s and 1980s. Modernizing that code is expensive, risky, and time-consuming. So companies keep paying IBM.

If AI can modernize COBOL cheaply and quickly, that revenue stream is at risk.

CFO James Kavanaugh pushed back hard on this narrative. He told Reuters that clients using IBM's Watsonx Code Assistant are actually seeing *faster growth* in mainframe consumption. "Gen AI in modernization of mainframe is actually an accelerator and accretive to the mainframe portfolio overall," he said .

CEO Arvind Krishna went even further, downplaying the impact of the Middle East conflict on IBM's business. He claimed that IBM had its strongest growth in the region in decades and could absorb disruption from the closure of the Strait of Hormuz for another few weeks .

### The Analyst Verdict

CFRA analyst Brooks Idlet offered a balanced take: "The stakes around these results were higher than normal given the software/services selling pressure the market has seen this year amid AI competition fears, and we do not think Q1's results validated those fears" .

In plain English: The AI threat to IBM is real, but it didn't show up in this quarter's numbers. The selloff may be an overreaction.

**The Bottom Line on IBM:** This is the classic innovator's dilemma playing out in real time. IBM is trying to sell AI tools that modernize the very systems it profits from. Whether that strategy works—or whether nimbler AI competitors eat its lunch—is the $150 billion question facing the company.

## Part 4: The Iran War Earnings Toll – The First Wave

### From Geopolitics to P&L

The ServiceNow disclosure is significant because it represents the first major acknowledgment from a U.S. tech giant that the Iran war is directly impacting earnings.

We have seen the macro effects—higher oil prices, supply chain disruptions, market volatility. But the ServiceNow news confirms what many investors feared: the conflict is causing enterprise customers to delay decisions.

When a company like ServiceNow—which sells software that helps businesses automate their operations—sees deals delayed because of geopolitical uncertainty, it is a warning sign for the entire enterprise software sector.

### Other Exposures to Watch

Which companies might be next? Any tech firm with significant sales in the Middle East or with customers who are postponing IT decisions due to uncertainty. That includes:

- **Salesforce:** Heavy enterprise exposure, particularly in financial services (a sector sensitive to geopolitical risk)

- **Oracle:** Larry Ellison's company has deep ties to the region and significant on-premise software revenue

- **Microsoft:** While cloud revenue is more resilient, large on-premise licensing deals could face similar delays

For now, the market is treating ServiceNow's disclosure as company-specific. But if other enterprise software firms report similar headwinds in the coming weeks, the sector could see a broader de-rating.

### The Ceasefire Facade

It is worth noting that the ceasefire is fragile at best. While Trump extended the truce, he also ordered the U.S. military to continue its blockade of Iranian ports. Iran dismissed the extension as "meaningless" and said the Strait of Hormuz will remain closed until the blockade is lifted .

Hours after Trump's announcement, Iran's Revolutionary Guard Navy claimed it had seized two container ships in the Strait of Hormuz for "maritime violations" .

This is not a peace. It is a pause. And until there is a real resolution, enterprise customers will remain cautious.

## Part 5: What This Means for Your Portfolio

### The AI Trade Enters a New Phase

For the past two years, the AI trade has been simple: buy the companies building the models (Nvidia, Microsoft, Google) and the companies using them to accelerate growth (ServiceNow, Salesforce, IBM).

That phase is ending.

We are now entering the "prove it" phase. Investors are no longer satisfied with AI promises. They want to see AI revenue. And they are punishing companies that show any sign that AI might be a disruption rather than an accelerant.

### Earnings Season Strategy

As more companies report in the coming weeks, here is what to watch:

| Signal | What It Means | Market Reaction |

| :--- | :--- | :--- |

| AI revenue beat | The company is monetizing AI effectively | Positive |

| AI revenue miss or delay | The company is struggling to convert AI interest into sales | Negative |

| Geopolitical deal delays (like ServiceNow) | The Iran war is hitting earnings directly | Negative |

| Strong guidance despite headwinds | Management has confidence in the second half | Positive |

### The Bottom Line for Thursday's Trading

Expect a mixed open. The S&P 500 and Nasdaq are taking a well-deserved breather after hitting record highs. ServiceNow and IBM will weigh on the tech sector, but broader market sentiment remains supported by the ceasefire extension and strong economic data.

Steer clear of chasing the ServiceNow dip just yet. The 13% drop is steep, but there may be more pain ahead if other enterprise software companies report similar headwinds. Wait for confirmation that the deal delays are truly one-time events.

IBM is a different story. The 6.5% drop looks more like an overreaction to an existential fear that hasn't materialized in the numbers. For long-term investors, IBM's 3.5% dividend yield and beaten-down valuation may be worth a look.

Keep an eye on oil prices and the Strait of Hormuz. As long as the waterway remains closed, the risk of further geopolitical shocks—and further earnings headwinds—remains elevated.

## Frequently Asked Questions (FAQ)

**Q: Why did ServiceNow stock drop after earnings?**

A: ServiceNow fell nearly 13% after revealing that the Iran war delayed several large on-premise deals, creating a 75 basis point headwind to subscription revenue growth. While the company beat top and bottom line estimates, the disclosure about geopolitical impacts spooked investors .

**Q: What is a "basis point" and why does 75 matter?**

A: A basis point is one-hundredth of one percent. Seventy-five basis points equals 0.75%. For a company with $36 billion in subscription revenue, that headwind represents hundreds of millions of dollars in delayed revenue .

**Q: Why did IBM stock fall after earnings?**

A: IBM fell over 6% because revenue growth slowed to 9% from 12.2% in the previous quarter, fueling fears that AI tools could disrupt its core software business—specifically after Anthropic announced an AI tool that can modernize COBOL, a language widely used on IBM's mainframes .

**Q: How is the Iran war affecting tech company earnings?**

A: The conflict is causing enterprise customers to delay large software deals due to uncertainty. ServiceNow specifically cited the Middle East conflict as the reason several large on-premise deals did not close in the first quarter .

**Q: Did ServiceNow raise its guidance despite the headwinds?**

A: Yes. ServiceNow raised its full-year subscription revenue guidance to $157.4–157.8 billion, up from the previous range of $155.3–155.7 billion. The company also issued strong second-quarter subscription guidance above analyst estimates .

**Q: Is IBM's AI threat real or overblown?**

A: The threat is real but likely overstated for the current quarter. As CFRA analyst Brooks Idlet noted, "we do not think Q1's results validated those fears." IBM's CFO argued that AI modernization tools are actually accelerating mainframe adoption .

**Q: Should I buy the dip in ServiceNow?**

A: (Disclaimer: Not financial advice.) The 13% drop is significant, but the company's fundamentals remain strong—it beat estimates, raised guidance, and announced a $5 billion buyback. However, until the Iran war situation stabilizes, there may be continued volatility. Long-term investors may see value at these levels, but short-term traders should be cautious .

**Q: What should I watch for in the coming days?**

A: Watch for earnings reports from other enterprise software companies. If they report similar geopolitical deal delays, the sector could face broader selling pressure. Also monitor oil prices and news from the Strait of Hormuz—any escalation could trigger another market selloff .

## Conclusion: The "Prove It" Phase Begins

We started this article with a market at record highs and a ceasefire that had investors feeling optimistic. We end with a reality check.

The AI trade is no longer a free ride. ServiceNow just demonstrated that even the best-run companies are not immune to geopolitical shocks. IBM just reminded investors that AI is as much a threat as an opportunity—especially for legacy tech giants.

The market pullback Thursday morning is modest. But the earnings warnings from these two tech bellwethers are not. They are signals that the "prove it" phase of the AI trade has officially begun.

For the rest of earnings season, investors will be watching for three things: AI revenue growth, guidance, and any mention of geopolitical headwinds. Companies that deliver on all three will be rewarded. Companies that stumble—even for reasons beyond their control—will be punished.

The ceasefire is holding, for now. But the market's patience is not infinite.

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*Disclaimer: This article is for informational purposes only. It does not constitute financial or investment advice. Stock prices and market conditions are subject to rapid change. Always consult a licensed professional before making investment decisions.*