1Q26 CIO Survey shows a slight upward revision to IT budgets, while application software vendors' AI relevance rises

Overview

This report is based on Morgan Stanley's AlphaWise 1Q26 CIO survey, covering 100 enterprise IT decision-makers, including 77 from the US and 23 from Europe, conducted from February 3 to March 10, 2026. The key conclusion is that expected external IT spending growth for 2026 improved versus the prior quarter's survey, AI/ML remains the most important spending theme, software budgets are relatively resilient, and services projects are less defensive in a weakening macro environment.

Core views

The report argues that expected 2026 IT budget growth improved from 3.4% in the 4Q25 survey to 3.7%, indicating a modest improvement in demand; however, short-term budget revisions still skew lower, suggesting corporate spending willingness has not fully recovered. Software is the most favored segment, with 2026 growth expected at 4.1%, above services at 2.0%. AI/ML is both the highest-priority investment area and a relatively defensive spending category in a macro downturn; application software vendors are increasingly involved in enterprise AI/LLM deployments, benefiting SAP and other vendors with ERP, CRM, digital transformation, and AI application use cases. By contrast, strategic consulting, infrastructure outsourcing, and business process outsourcing are less defensive, which is unfavorable for the IT services segment.

Analysis framework

The report uses a CIO survey framework to assess 2026 enterprise IT spending trends across budget growth, budget revision direction, technology categories, vertical industries, cloud migration, AI/LLM adoption, vendor beneficiaries, and macro defensiveness, and compares 1Q26 results with 4Q25, 1Q25, and long-term averages.

Methodology notes

• Survey researchMorgan Stanley AlphaWise CIO Survey

  Enterprise CIO spending intention survey

  Measures changes in corporate customers' expectations for IT budgets, cloud, AI/LLM, and software/services procurement through phone and online interviews with 100 enterprise IT decision-makers.

• Budget momentumUp/down ratio

  up-to-down ratio

  Calculated as the share of CIOs expecting budget increases divided by the share expecting budget decreases; the one-year ratio is 0.8x, meaning short-term budget revisions still skew downward.

• Industry comparisonSpending growth and defensiveness ranking

  Compare budget growth and downside risk by technology category and project type

  The report compares the relative resilience of software, services, hardware, communications, and projects such as AI/ML, security, ERP, CRM, consulting, and others under growth and downturn scenarios.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• European software sector

  core beneficiary asset

  Strengths

  Expected 2026 software spending growth is 4.1%, the highest among technology categories; AI/LLM and digital transformation continue to drive enterprise application demand.

  Weaknesses

  Short-term budget revisions still skew downward, and macro or geopolitical uncertainty may delay deal signings.

  Comparison

  Clearly better than the 2.0% spending growth expected for services.

  Risks

  If enterprise IT budgets are revised lower due to macro pressure, software companies, especially those with quarter-end heavy booking patterns, may see deal closures delayed.

• SAP SE

  potential beneficiary named in the report

  Strengths

  Benefits from strong demand for ERP applications, CRM applications, digital transformation, and AI/ML, as well as relatively strong defensiveness.

  Weaknesses

  The report also notes that software companies with later-quarter revenue recognition may face booking friction in 1Q.

  Comparison

  ERP and digital projects are more defensive than strategic consulting and outsourcing services.

  Risks

  Macro uncertainty or impacts related to Middle East conflict may cause customers to delay signings or make management guidance more cautious.

• Temenos Group AG

  potential beneficiary of improvement in financial verticals

  Strengths

  Expected IT spending growth in financials improved from about 2.9% to about 4.7%, which the report views as positive for Temenos.

  Weaknesses

  As a software company, it may still be affected by budget revisions and the timing of deal closures.

  Comparison

  Financial vertical growth is higher than in most industries other than healthcare and technology.

  Risks

  If macro risks cause financial institutions to delay IT projects, the positive impact may be smaller than indicated by the survey.

• IT services sector

  relatively unfavorable asset

  Strengths

  Still has expected 2026 growth of 2.0%, and some services demand may come from transformation and cloud projects.

  Weaknesses

  Services growth is below software, and strategic consulting, infrastructure outsourcing, and business process outsourcing are less defensive in a downturn.

  Comparison

  The report explicitly prefers software over services.

  Risks

  In a macro downturn, services projects are more likely to be cut or delayed, and company guidance may turn more cautious.

• Microsoft Azure and Amazon Web Services

  beneficiaries of cloud migration

  Strengths

  CIOs still view Microsoft and Amazon as the main beneficiaries of incremental cloud migration spending; current IaaS and PaaS usage remains high.

  Weaknesses

  In AI/LLM deployments, the preference for application software vendors is rising, narrowing the lead of hyperscale cloud providers.

  Comparison

  Cloud providers benefit more from workload migration than traditional infrastructure vendors.

  Risks

  Cloud cost-control initiatives may affect the growth rate of public cloud spending.

Key data

• Expected 2026 IT budget growth3.7%Above the 3.4% in the 4Q25 survey, but below the pre-pandemic 10-year average of 4.1%.
• Expected software spending growth4.1%Software remains the fastest-growing technology category, about 30bps above the 4Q25 and 2025 growth expectations.
• Expected services spending growth2.0%Services growth expectations are roughly flat, but below software, supporting the report's preference for software over services.
• US vs. Europe CIO budget growthUS 3.9%, Europe 3.0%US CIO expectations are about 90bps higher than those in Europe.
• One-year budget revision up/down ratio0.8xImproved from 0.5x in 4Q25, but still below the neutral 1.0x and the long-term 1Q average of 1.4x.
• Three-year budget revision up/down ratio2.7xBelow 4Q25's 2.9x and also below the roughly 3.7x three-year average.
• AI/LLM production progressAbout 76%CIOs have already put their first AI/LLM project into production or plan to do so within the next nine months; only 4% have no near-term AI/LLM plans.
• Public cloud IaaS usage rate73%1Q26 surveyed CIOs using public cloud IaaS, essentially stable versus 71% in 1Q25.
• Public cloud PaaS usage rate67%Up from 62% in 1Q25; the expected three-year usage rate is 82% for IaaS and 71% for PaaS.
• High-growth vertical industriesFinancials 4.7%, Healthcare 4.1%, Technology 3.8%Financial verticals saw the largest sequential improvement, which the report says is favorable for Temenos.

Impact & implications

From an investment perspective, the software segment benefits from higher budget growth, AI/ML priority, and rising application software participation in AI deployments; companies such as SAP and Temenos, with exposure to ERP, CRM, financial software, and digital transformation, are called out as beneficiaries. The IT services segment is relatively weaker, especially strategic consulting, infrastructure outsourcing, and business process outsourcing, which are more likely to be cut in a downturn. Cloud migration continues to support cloud providers such as Microsoft Azure and Amazon Web Services, while traditional infrastructure vendors such as Hewlett-Packard Enterprise, Oracle, VMware, Dell, and Cisco may face share loss.

Risks

• Near-term budget revisions still skew downward, with the one-year up/down ratio at 0.8x, below neutral.
• The Middle East conflict and other geopolitical uncertainties may delay or dampen corporate IT spending intent.
• Software companies with later-quarter revenue recognition may face booking friction in 1Q, including SAP, Dassault, and Temenos.
• Strategic consulting, CRM applications, data center build-out, infrastructure outsourcing, and business process outsourcing are more likely to be cut in a downturn.
• Some survey sub-samples are small, such as the revenue $10bn to $15bn company cohort with n=3, which limits the reliability of related conclusions.
• Changes in historical survey vendors and sample composition may affect cross-period comparability.

What to watch

• Whether expected 2026 IT budget growth can remain above 3.7% and move toward or above the pre-pandemic 10-year average of 4.1%.
• Whether the one-year budget revision up/down ratio can rise back above 1.0x, confirming that short-term budget risk has turned neutral or positive.
• The speed at which AI/LLM projects move from pilot to production, especially changes in the participation level of application software vendors relative to hyperscale cloud providers.
• 1Q orders and management guidance from later-quarter software companies such as SAP, Temenos, and Dassault.
• Changes in public cloud IaaS/PaaS adoption, cloud cost-control measures, and the share of cloud spending tied to AI/ML.
• Whether IT spending in financials, healthcare, and technology continues to grow faster than average.