International Business Machines (IBM) is set to report its second-quarter earnings on July 22, and investors are watching closely to see whether its software and AI bets can deliver a modest lift to long-term targets. Bank of America (BofA), a major U.S. bank, expects the tech giant to post roughly $18 billion in revenue and earnings per share of $3.03, alongside a 50-basis-point improvement in pretax margin — that is, profit before taxes as a share of sales.
The focus is on two key growth drivers: Red Hat, IBM's open-source software subsidiary, and the early integration of Confluent, a data-streaming company IBM recently acquired. Confluent's tools help businesses move data in real time for analytics and AI applications, a capability that is increasingly central to enterprise technology strategies.
Red Hat and Confluent: The Engines of Growth
Red Hat has been a bright spot for IBM in recent quarters, as businesses continue to adopt its cloud-native software. The unit's performance is critical because it represents IBM's push into higher-margin software and services, away from its legacy hardware and consulting businesses. Analysts at BofA credit steady software demand and early benefits from integrating Confluent as reasons for their optimistic outlook.
Confluent, which IBM acquired for about $6.5 billion, is expected to add roughly $340 million in revenue over time, according to BofA estimates. The acquisition closed in early 2025, and the second quarter will be one of the first full periods where Confluent's results are included in IBM's financials. For investors, the key question is whether Confluent can accelerate IBM's data and AI software sales, particularly as companies race to deploy generative AI tools that rely on real-time data streams.
BofA also sees potential for a slight bump to IBM's 2026 guidance, which would signal confidence in the company's growth trajectory. A 50-basis-point improvement in pretax margin — from, say, 15% to 15.5% — might not sound dramatic, but for a company with $60 billion in annual revenue, it translates to hundreds of millions in additional profit.
What It Means for Investors
IBM's stock has been a relative laggard in the tech rally, as investors have favored faster-growing companies in AI and cloud computing. However, the company's focus on software and services, combined with its dividend yield of around 3%, makes it a staple for income-oriented investors. The upcoming earnings report will test whether IBM can convince the market that its AI strategy is gaining traction.
For everyday investors, the key metrics to watch are Red Hat's revenue growth, Confluent's contribution, and any changes to full-year guidance. A steady quarter with a modest guidance lift could reassure shareholders that IBM's transformation is on track. On the other hand, any signs of weakness in software demand or integration challenges with Confluent could weigh on the stock.
Broader market context also matters. The tech sector has been volatile recently, with concerns about AI chip demand and interest rates. As Morgan Stanley warns that the AI chip rally may be peaking, investors are shifting focus to the companies that actually use those chips — the so-called hyperscalers and enterprise software firms like IBM. Meanwhile, Nasdaq futures have risen as chip stocks stabilize, suggesting that earnings reports from major tech companies will be the next catalyst for market direction.
Looking Ahead
IBM's earnings come at a time when the broader market is digesting mixed signals from the economy. European stocks have slipped as tech and oil shares cool, while banks hold steady. In the U.S., the Federal Reserve's next moves on interest rates remain a key variable for growth stocks, though IBM's more defensive profile — with its recurring software revenue and dividend — offers some insulation.
BofA's positive stance is echoed by other analysts, but investors should remember that IBM's turnaround is a long-term story. The company has been restructuring for years, shedding low-margin businesses and investing in cloud and AI. The second-quarter report will be an important checkpoint, but it's unlikely to be a make-or-break moment. For those holding IBM shares, the focus should be on whether the company can sustain its software momentum and gradually improve profitability.
As always, no single earnings report tells the whole story. Investors should consider IBM's results in the context of its multiyear transformation and the broader tech landscape. The July 22 report will provide fresh data points, but the real test will come over the next few quarters as Confluent's integration deepens and Red Hat continues to compete in a crowded cloud market.
