The stocks of the U.S. IT hardware were sold off sharply following Morgan Stanley releasing a negative prognosis of the sector pointing out to indications of slowing of corporate demand at a time when economic uncertainty and the increasing costs of technology are putting strains on technology budgets. The threat shot through markets fast, sending the stocks of some of the largest enterprises in enterprise hardware plummeting and reminding of the question of how long-term the recent growth patterns are as the sector enters into 2026.
The declassification was received when investors were already nervous regarding the weakness in the market. Morgan Stanley lowered its rating on the IT hardware industry to a cautious rating versus an in line rating due to a reduction of both demand and a continuation of cost pressures and low valuations that have little room to be disappointed. The brokerage says that technology leaders in corporate America are growing more conservative in their hardware acquisition budgets, which may soon put a lot of pressure on those manufacturers whose volume depends on huge corporate orders.
Wall Street was quick of reaction. Hewlett Packard Enterprise and Dell technologies shares were down by up to 5 percent in the session, as there are fears that server and infrastructure expenditure could come back even weaker than earlier anticipated. HP Inc was also down as well as U.S.-traded shares of the logitech and NetApp fell more sharply after Morgan Stanley downgraded both companies to underweight instead of equal-weight. The force of selling that was moving throughout the industry and forcing the overall index of IT hardware down at the outset and highlighted how fragile the industry has become to a change in mood.
The grave concern of Morgan Stanley is the combination of adverse forces as it termed it. The analysts wrote that a slowing demand, input cost inflation and high valuations make up a potential perfect storm that causes us to become more defensive through 2026. Such evaluation reflects a mood which has been slowly accumulating over months. Whereas hardware manufacturers were enjoying post-pandemic refresh cycles and a shift in interest towards AI-related infrastructure, the tide now seems to be slowing down as companies start to look more seriously at areas of spending.
Among the details that were impressive was the recent survey of corporate technology spending by the brokerage. It indicated a 1 percent year on year growth in hardware spending which is the poorest non-COVID level in nearly 15 years. To a sector that is used to the fluctuations of a boom and a decline, such a low number is not indicative of a temporary hiatus. It is an allusion to a structural warning in buyers who are striking a balance between the ambitions of digital transformation and the constrained financial situations and an unpredictable economic future.
Another layer of concern was a separate survey of value-added resellers that Morgan Stanley made. The results indicated that 30 to 60 percent of the customers may reduce intended purchases of PCs, servers, and storage in case manufacturers attempt to push through rises in prices associated with rises in cost of components. This is important since resellers are in close proximity to the end customers and in most cases, they will notice any change in the purchasing behavior before it can be reflected in the headline sales figures. In case these intentions become action, hardware vendors will have fewer opportunities to afford to transfer increased costs without volumes.
One of the problems that has been persistent is component inflation. The prices of memory have been fluctuating, the supply chains are yet to have adjusted to the geopolitical tensions and the manufacturing costs have not yet normalised. These pressures constrain flexibility of hardware companies which are already running on fairly thin margins. Such costs can be absorbed or passed across when the demand is high. A much more serious issue when demand becomes soft is on companies that compete on price-sensitive markets such as PCs and commodity servers.
Political uncertainty also adds to the situation. Although artificial intelligence has also offered a respectable tailwind to specific sections of the hardware market, the issue of tariffs that have been offered by President Donald Trump has taken a toll on the mood. There are also potential trade barriers and changes in the import cost, which is another variable that needs to be taken into consideration when making forecasts by the company and investors. The customers are even likely to postpone purchases before more information is brought out on policy changes.
The tone of caution is shared by other analysts. Citigroup reported that the industry is in a more difficult spot with hardware firms and distributors experiencing more turbulent enterprise demand, escalating memory prices, and increasingly lacklustre PC shipments as the industry looks to 2026. The combination of these conflicting pressures provides a situation in which the expectations of earnings can be rosy. According to Morgan Stanley, it means that the more costs are high and the demand is elastic, the more downside earnings estimates can be corrected in 2026. That quote is indicative of a larger concern that consensus forecasts are yet to adapt completely to a lower growth reality.
In a more long-term view, the present pullback would pose a question of how the IT hardware industry would develop in the years to come following the dynamic accelerated over the years. Most companies tried to put a lot of money in satisfying the skyrocketing demand of cloud infrastructure, remote working software, and systems with AI capabilities. Investments of that type were reasonable in that period, yet they also added capacity and competition. In case the modern growth of demand slows down, the industry might reach the stage when efficiency, price discipline, and product differentiation are considered more than scale.
This shift has also the human aspect which is usually ignored. Corporate IT managers have been forced to work with less by doing more, walking the fine line between innovation and cost management. Hardware refresh cycles that previously used to run on autopilot are being drawn and quartered and buying decisions are being looked at closer. Delays in upgrades and staged rollouts are becoming more and more widespread as conversation in the industry than massive, upfront commitment.
All this does not imply that the long-term requirement of the IT hardware is going away. Digital infrastructure is still a prerequisite and new requirements will emerge due to the emergent technologies. The road ahead is however not all smooth as the investors got used to be in the previous growth cycle. The following year will determine who will be strong and strategic enough to survive the slowing demand without sacrificing profitability.
