Morgan Stanley analyst Keith Weiss reports that AI excitement isn't translating into higher IT budgets for 2026. A recent CIO survey shows spending growth will slow to 3.4% next year, down from 3.5% in 2025. This modest deceleration disappoints market expectations, especially given the sustained hype around generative AI capabilities.

The pullback is broad-based, with Communications, Hardware, and IT Services seeing the sharpest declines. A key driver is a 'do more with less' mindset, plus funding shifting outside traditional IT departments. Companies are reallocating funds within a 'K-shaped' budget, favoring Software while cutting Hardware and Communications spending.

Despite the gloom, opportunities exist. Hyperscalers, data management, and security platforms appear best positioned to monetize generative AI. These consolidators within the Software sector could still see gains. The survey's one-year sentiment reading also dipped, indicating more CIOs plan to cut budgets rather than increase them.