2Q26 CIO survey shows improving IT budget support, but winners remain highly selective

Overview

Based on Morgan Stanley AlphaWise's survey of 76 U.S. CIOs and 24 European CIOs conducted from May 8 to June 8, 2026, this report evaluates spending trends in external IT budgets, AI/ML, software, security, public cloud, hardware, networking equipment, and IT services in 2026. The core conclusion is that the IT budget environment has improved versus the prior quarter, and near-term budget upgrade signals have strengthened, but companies are still allocating capital more cautiously, so winners at the industry and vendor levels will not broaden universally.

Core views

The report believes expected IT budget growth for 2026 has ticked up to 3.8%, while the near-term budget upgrade/downgrade ratio has risen to 1.2x, indicating that the budget environment is improving. Software remains the fastest-growing tech sub-sector, and security software combines high priority, strong defensiveness, and accelerating spending, making it the cleanest category winner. AI/ML remains CIOs' top priority, but its defensiveness has declined from the prior quarter, indicating stricter CIO screening of AI projects. Leveraging Azure, M365/O365, Copilot, GitHub, Fabric, and enterprise distribution capabilities, Microsoft remains the clearest beneficiary of GenAI and cloud migration; LLM Providers have become the second-tier share winners in AI-related spending. Hardware budget improvement is limited, and IT services are still being crowded out by AI from discretionary projects.

Analysis framework

The report uses a CIO survey framework to compare expected budget growth in 2026 versus 2025, quarter-over-quarter changes, one-year and three-year budget upgrade/downgrade ratios, project priorities, project defensiveness, vendor share changes, public cloud migration, AI funding sources, and spending intentions across different technology sub-sectors. The analysis focuses not on a single company's financial model, but on determining the order of industry and asset beneficiaries through budgets, priorities, and vendor selection.

Methodology notes

• Survey ResearchMorgan Stanley AlphaWise CIO Survey

  CIO budget and spending intention survey

  Measures IT budget growth, upgrade/downgrade expectations, project priorities, vendor share changes, and industry spending trends through questionnaire responses from CIOs in the U.S. and Europe.

• Industry ComparisonBudget Growth and Upgrade/Downgrade Ratio

  Short-term and medium-term budget momentum

  The one-year upgrade/downgrade ratio is used to assess the direction of near-term budget revisions, while the three-year upgrade/downgrade ratio is used to measure the medium-term trend of IT spending as a share of revenue.

• Thematic InvestingAI/ML and Security Software Priority Analysis

  Project priority and defensiveness

  The report compares CIO priorities and budget defensiveness to identify technology spending areas more likely to be protected or increased under a macro-uncertain environment.

Asset mapping & comparison

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

• Microsoft

  The clearest beneficiary of GenAI, cloud migration, and enterprise software

  Strengths

  Leads across multiple dimensions including incremental GenAI share, agentic automation, custom AI applications, Azure, M365/O365, Copilot, GitHub, and Fabric.

  Weaknesses

  Some AI share metrics have pulled back from 1Q26 highs, for example expected GenAI share gains in 2026 fell from 32% to 27%.

  Comparison

  Compared with other software vendors, Microsoft remains the most stable and broadest winner.

  Risks

  Declining defensiveness of AI projects and a shift in customer budgets from net-new spending to reallocation could affect the monetization slope.

• Security Software

  The clearest winner at the category level

  Strengths

  Expected 2026 spending growth rose to 12.4%, it ranks second in CIO priority, and it has the highest net defensiveness score.

  Weaknesses

  There may still be competition and consolidation pressure at the vendor level.

  Comparison

  Compared with application software, security software offers both accelerating growth and budget defensiveness.

  Risks

  If the macro environment deteriorates significantly or budgets are reallocated, security spending growth may come in below survey expectations.

• LLM Providers

  Second-tier share winners in AI-related spending

  Strengths

  Receive direct CIO attention in GenAI spending and custom AI application development, with expected three-year share gains of 17%.

  Weaknesses

  Near-term share gains have not accelerated meaningfully, with expected 2026 gains slipping from 12% to 11%.

  Comparison

  Rank behind Microsoft, but pose wallet-share risk to traditional application software vendors.

  Risks

  Commercialization paths, enterprise procurement models, and coopetition with large platforms remain uncertain.

• Amazon

  A beneficiary of public cloud migration and GenAI spending

  Strengths

  Ranks second only to Microsoft in cloud migration share gains, with expected GenAI share gains of 10% in 2026.

  Weaknesses

  Compared with Microsoft, its coverage is narrower in enterprise software distribution and office suite use cases.

  Comparison

  Cloud infrastructure benefits are clear, but mindshare at the AI application layer lags Microsoft.

  Risks

  Cloud migration speed, AI workload competition, and pricing pressure could affect growth.

• IT Services

  A relative laggard in the improving budget environment

  Strengths

  59% of respondents expect GenAI to increase spending on traditional IT outsourcing, suggesting long-term potential demand as experimentation scales into production.

  Weaknesses

  Expected services spending growth for 2026 fell to 1.8%, making it the only major IT category to weaken quarter over quarter.

  Comparison

  Weaker than software, communications, and hardware in quarter-over-quarter budget revision performance.

  Risks

  AI investment may continue to crowd out discretionary services projects, and evidence of recovery remains insufficient.

Key data

• Expected IT budget growth for 2026+3.8%Up 14 basis points from +3.7% in 2025 and slightly above the +3.7% from the 1Q26 survey, but below the 2010-2019 average of +4.1%.
• One-year budget upgrade/downgrade ratio1.2xRose from 0.8x in 1Q26 to 1.2x, with 30% of CIOs expecting upgrades and 25% expecting downgrades.
• Three-year IT spending-to-revenue upgrade/downgrade ratio2.8x42% of CIOs expect IT spending as a share of revenue to rise over the next three years, while 15% expect it to decline.
• Expected software spending growth for 2026+4.1%Software remains the fastest-growing technology sub-sector, but quarter-over-quarter improvement was only 3 basis points.
• Expected security software spending growth for 2026+12.4%Above +8.9% in 2025 and also above +9.4% in the 4Q25 survey.
• AI/ML CIO priority18.0%AI/ML remains ranked first, slightly up from 17.7% in 1Q26.
• Security software CIO priority11.3%Ranked second, up 60 basis points from 1Q26.
• Net defensiveness score for security software+15%The most defensive IT project in the survey, above +12% in 1Q26.
• Net defensiveness score for AI/ML+4%Down 600 basis points from +10% in 1Q26, indicating reduced protection for AI projects.
• Current share of public cloud workloads48%CIOs expect this to rise to 52% by the end of 2026 and 66% by the end of 2028.
• Expected Microsoft GenAI share gain in 202627%Still ranked first, but below 32% in 1Q26.
• Expected Microsoft 365 Copilot usage over the next 12 months88%Above 80% in 4Q25, supporting the M365 premiumization and Copilot monetization thesis.

Impact & implications

The investment implication is that improving IT budgets provide better macro support for technology spending, but not enough to support a broad re-rating of software or the technology sector. Priority should be given to areas that simultaneously have budget priority, spending acceleration, defensiveness, and clear vendor share expansion, including Microsoft, security software, public cloud, and parts of the AI infrastructure/LLM ecosystem. Application software needs a clearer budget inflection point; hardware is more neutral due to component costs and valuation; and IT services still lack evidence of a near-term recovery in discretionary demand.

Risks

• The share of net-new budgets within AI funding sources has declined while budget reallocation has increased, which may weaken the incremental nature of AI spending.
• Although AI/ML remains the top priority, its net defensiveness fell from +10% to +4%, indicating stricter project screening.
• Software spending expectations were nearly flat quarter over quarter, and application software lacks evidence of a broad inflection point.
• Hardware stock valuations have already risen significantly, while budget growth has improved only modestly, creating a risk of mismatch between valuations and fundamentals.
• IT services spending expectations deteriorated quarter over quarter, and AI may continue to crowd out traditional discretionary services projects.
• Morgan Stanley disclosed that it may have investment banking or other business relationships with covered companies, so the research conclusions should be used cautiously in light of potential conflicts of interest.

What to watch

• Whether expected IT budget growth for 2026 continues to move toward the long-term average of 4.1% in subsequent CIO surveys.
• Whether the one-year budget upgrade/downgrade ratio can remain above 1.0x.
• Whether the share of net-new budgets within AI funding sources stabilizes or continues shifting toward reallocation of existing IT budgets.
• Microsoft's actual monetization pace in GenAI, Copilot, Azure, and M365 E5/E7 premiumization.
• Whether accelerating security software spending translates into order and revenue growth for major security vendors.
• Whether application software vendors see broader budget acceleration, rather than only a few companies such as Microsoft and ServiceNow benefiting.
• Whether IT services demand moves from the AI experimentation phase into large-scale production deployment, thereby improving consulting and systems integration spending.
• Whether the share of public cloud workloads rises from 48% to 52% by the end of 2026 and 66% by the end of 2028 as CIOs expect.