2026 IT budget revision risk has shifted more toward the upside, with Software remaining the strongest growth category

Overview

Based on Morgan Stanley's AlphaWise 2Q26 CIO survey, the report evaluates 2026 IT budgets, budget revision risk, spending trends in Software and IT Services, AI priorities, cloud migration, and SaaS and ERP upgrade cycles. The overall conclusion is that the IT spending environment has improved slightly versus the previous survey, especially with near-term budget revision risk shifting more to the upside; however, the improvement is uneven, with Software showing stronger relative resilience while IT Services still faces slower growth and discount pressure.

Core views

The core views are as follows: first, expected external IT spending growth for 2026 rose to 3.8%, with the US at 3.9% and the EU at 3.5%; second, Software continues to lead with expected growth of 4.1%, while Services is only 1.8% and weakened sequentially; third, the 1-year budget upward/downward revision ratio rose to 1.2x and the 3-year ratio rose to about 2.8x, indicating a constructive tilt in both short-term and medium-to-long-term budget revision direction; fourth, AI remains the top spending priority, but it is more likely to be re-evaluated under macro pressure scenarios; fifth, cloud migration continues to benefit Microsoft and Amazon, while Dell, Oracle, and Hewlett-Packard Enterprise are seen as more likely to lose related budget share.

Analysis framework

The report uses a CIO questionnaire survey approach, breaking down results by region, industry vertical, company size, IT spending category, project priority, vendor budget share, willingness to discount, and cloud workload migration path, and compares them with 1Q26, 4Q25, 2Q25, and historical quarterly survey results.

Methodology notes

• survey_researchMorgan Stanley AlphaWise CIO Survey

  CIO budget intention survey

  Measures enterprise IT spending trends through CIO responses on external IT spending, project priorities, vendor budget share, and budget revision direction.

• revision_riskUp-to-Down Ratio

  budget upward/downward revision ratio

  Calculated by dividing the share of CIOs expecting upward budget revisions by the share expecting downward budget revisions; above 1.0x indicates upward-tilted revision risk, while below 1.0x indicates downside risk.

• sector_allocationIT spending category comparison

  IT spending category comparison

  Compares growth expectations across categories such as Software, Services, Hardware, and Communications to identify relative resilience and relative pressure.

Asset mapping & comparison

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

• Software

  Benefits from IT budget resilience and SaaS spending growth

  Strengths

  Expected to grow 4.1% in 2026, the highest among major IT categories; SaaS project spending is expected to grow 4.9%.

  Weaknesses

  The report believes there is still no sign of broad acceleration in application software demand, and vendor-level intentions remain differentiated.

  Comparison

  Relative to Services, Hardware, and Communications, Software has the strongest growth expectations.

  Risks

  If the macro environment weakens or budget reallocations favor shorter-term ROI projects, some application software spending may be postponed.

• IT Services

  Enterprise AI/digital execution demand provides structural opportunities, but near-term budgets remain under pressure

  Strengths

  77% of CIOs said they would involve external professional IT Services vendors in the planning or execution of AI/ML/PA upgrade projects.

  Weaknesses

  Expected Services growth for 2026 is only 1.8%, weaker than in the previous survey; vendor willingness to discount has increased.

  Comparison

  Compared with Software, IT Services growth is slower and pricing pressure is more evident.

  Risks

  Weak budget growth, project delays, intensified vendor competition, and wider discounting may pressure revenue and margins.

• Microsoft

  A key potential beneficiary of cloud migration and AI spending share

  Strengths

  The survey shows Microsoft ranking near the top in benefiting from cloud migration budget share, and expected software spending growth is 7.6% year over year.

  Weaknesses

  The report does not provide separate valuation or rating changes.

  Comparison

  Along with Amazon, it is a primary beneficiary of cloud migration.

  Risks

  If enterprise AI spending shifts from net new budget to budget reallocation, visibility on incremental spending may decline.

• Amazon

  A major beneficiary of cloud migration

  Strengths

  CIOs expect Amazon to gain budget share as workloads shift to the cloud.

  Weaknesses

  The report does not provide a specific AWS spending growth rate.

  Comparison

  Ranks behind Microsoft in the ordering of cloud migration beneficiaries.

  Risks

  Competition for cloud budgets, enterprise cost optimization, and vendor pricing negotiations may affect growth.

• SAP

  Supported by the ERP upgrade cycle and project defensiveness

  Strengths

  SAP S/4HANA, at 22% of respondents, is the most frequently mentioned platform for the next round of SaaS ERP/GL upgrades; ERP project defensiveness has improved.

  Weaknesses

  The net spending outlook for ERP fell from 38% in 2Q25 to 15%, and upgrade timing still skews toward later years.

  Comparison

  It has returned to the top position in platform choice for the next ERP/GL upgrade cycle.

  Risks

  Delays in the upgrade cycle and budget scrutiny may postpone revenue realization.

Key data

• Expected IT budget growth for 2026+3.8%Up slightly by about 10bps from 3.7% in 1Q26.
• Software growth expectation+4.1%The fastest growth among major IT categories, about 30bps higher than 2025 growth and broadly flat versus 1Q26.
• Services growth expectation+1.8%About 30bps below 2025 growth and weaker by about 20bps versus 1Q26.
• 1-year budget upward/downward revision ratio1.2xRose from 0.8x in 1Q26 to 1.2x, the first time above 1.0x since 1Q24.
• 3-year upward/downward revision ratio for IT spending as a share of revenue2.8xAbout 42% of CIOs expect IT spending as a share of revenue to rise over the next three years, while about 15% expect it to decline.
• US and EU expected IT budget growth for 2026US 3.9%; EU 3.5%The US remains above the EU, while the EU improved by about 50bps versus 1Q26.
• Public cloud workload shareAbout 48% currently; about 52% by end-2026; about 66% by end-2028Cloud migration remains a long-term structural trend.
• Source of new AI budget funding54% use net new budgetBelow 61% in 4Q25; 40% support AI projects through budget reallocation from other business areas.
• Expected SaaS project spending growth+4.9%Growth in 2026 versus 2025, above 3.6% in 2025 versus 2024.
• Intent for the next SAP S/4HANA ERP/GL upgrade round22%Most frequently mentioned in the next round of cloud SaaS ERP/GL upgrades, supportive of SAP's positioning.

Impact & implications

From an investment perspective, the survey is more positive on overall IT budgets and Software spending, supporting themes related to software, cloud, and certain ERP upgrade cycles; however, the signals for IT Services are more cautious because budget growth expectations have weakened and vendor willingness to discount has increased. AI remains a long-term investment priority, but the share funded by net new budget has declined and project defensiveness has fallen, suggesting that AI-related spending may be moving from early enthusiasm into a phase of stricter ROI and macro-sensitivity evaluation.

Risks

• The macro defensiveness of AI projects has declined; if the economy deteriorates, AI-related projects and infrastructure spending may be reprioritized.
• Expected budget growth for IT Services has weakened, and vendor willingness to discount has increased, potentially creating pressure on revenue growth and margins.
• Sample sizes for some industry and company-size subgroups are small, so vertical industry readings should be interpreted cautiously.
• There have been changes in survey vendors and sample structure in historical surveys, so some long-term historical comparisons may be affected by comparability issues.
• There are differences between US and EU growth expectations, and changes in regional macro environments may affect budget realization.

What to watch

• Whether the 2026 IT budget upward/downward revision ratio can continue to stay above 1.0x.
• Whether Software spending shifts from resilience to broader demand acceleration.
• Whether the discount trend among IT Services vendors continues to widen and whether it affects margins.
• Whether the share of net new budget within AI budgets continues to decline.
• The pace of public cloud workload migration toward the 66% target by 2028.
• Whether SAP S/4HANA intentions in the ERP upgrade cycle can translate into actual project launches.