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- [00:00]
IBM Executive
So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now a global workforce of 300,000 can use AI to fill their HR questions, resolving 94% of common questions, not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business IBM.
- [00:34]
Alex Osola
The Trump administration unveils new tariffs on 60 countries plus oil prices pass $100. The 10 year treasury hits an 18 month high and mortgage rates are at their highest levels in nearly a year as the Middle east conflict ripples through markets and IBM's earnings tell investors more about what went wrong for its business in the second quarter.
- [00:55]
Anissa Gardizzi
Investors believed IBM when they said that AI was a tailwind for them and that customers really needed to buy more mainframes, that they could do more AI. But as we saw last quarter, that actually wasn't the case.
- [01:06]
Alex Osola
It's Thursday, July 23rd. I'm Alex Osola for the Wall Street Journal. This is the PM edition of what's News, the top headlines and business stories that move the world today. The US Will impose new tariffs on its major trading partners. The new tariffs are meant to replace President Trump's temporary 10% global tariff, which expires tomorrow China. Trump put that temporary tariff in place in February after the Supreme Court struck down many of his tariffs. The new tariffs target 60 countries, or about 99% of U.S. trade. The administration says they're designed to push against forced labor. Countries that have laws against forced labor were given a 10% tariff, while those without those laws were given a 12 and a half percent tariff. There are exemptions for some goods, like steel, which comes under a separate national security tariff. The tariffs aren't expected to have much immediate impact since their rates are similar to the 10% global tariff that they're replacing. But trade experts say that the administration has other tariff plans and those could raise costs for businesses and consumers. President Trump has added a new hurdle to the nuclear deal with Saudi Arabia. It's contingent on the kingdom normalizing relations with Israel. Saudi Arabia was close to doing so during the Biden administration. The October 7, 2023 attack by Hamas and subsequent war sidetracked those talks. The Saudis now are open to normalization, but they insist that the Israeli government commit to a plan to establish a Palestinian state. The 30 year multibillion dollar nuclear deal with Saudi Arabia was announced yesterday and it potentially opens the door to uranium enrichment in Saudi territory. The Saudi Embassy in Washington didn't respond to a request for comment on the conflict with Iran. President Trump said the US Would hold Iran responsible for future attacks by Houthi militants and threatened, quote, military punishment on both. His threat comes after the Houthis fired on two Saudi tankers in the Red Sea. The group says the ships violated a naval blockade it has imposed on Saudi shipping. It's a move that threatens to choke an important route in the global oil supply. WSJ national security reporter Lara Seligman says that even though the Houthis are in Yemen and aren't operating anywhere near Iran, the group has a well known relationship with the country.
- [03:20]
Lara Seligman
Iran has historically supplied arms and other resources to the Houthis. So obviously we're in this broader direct conflict with Iran. The Houthis have stayed out of it, but now we're seeing them take on the Saudis in this separate conflict that Trump is now linking to the broader Iran conflict.
- [03:36]
Alex Osola
Trump is considering expanding the conflict with Iran.
- [03:39]
Lara Seligman
Trump has been escalating the rhetoric against Iran lately. The tenuous ceasefire deal that they've made is falling apart. Iran keeps attacking ships in the Strait of Hormuz. Then the Trump administration is responding by sending military aircraft and bombing. In fact, last night, U.S. forces bombed Iran for the 12th consecutive night. The conflict is heating up. So I think that President Trump's aim here is to put some additional pressure on Iran. And don't forget that there's a big squeeze on oil right now with the Strait of Hormuz. And this issue that we're having in the Red Sea with the Houthis firing on Saudi ships in the Red Sea is going to add another squeeze to oil prices.
- [04:20]
Alex Osola
Brent crude futures jumped 7% today to more than $100, the highest in about two months. And stocks fell after earnings from Google parent Alphabet and Tesla deep in fears about how much big tech companies are spending on AI. The phrase of the day is free cash flow, which turned negative at both companies. Free cash flow is the money companies have left over after expenses and making big ticket investments. It offers investors an idea of how much cash is available for things they like, like dividends and stock buybacks. Alphabet dropped 7.1% today, while Tesla tumbled 15%. The Nasdaq fell more than 2%, while the Dow and the S and P both dropped about 1%. The breakdown in the ceasefire with Iran is also sending treasury yields higher. The 10 year rose to 4.7%, the highest level since January 2025. That's because the jump in energy prices could push the Federal Reserve to raise interest rates. Sam Goldfarb, who covers bonds for the Journal, says Treasury yields set a floor for interest rates across the economy.
- [05:21]
Sam Goldfarb
As they go up, all the other borrowing costs go up. Most notably, mortgage rates have been rising right along with treasury yields. And it's finally starting to affect stocks a little bit because it gives investors an alternative place to put their money. So instead of like taking the risk of owning stocks, they can now get a pretty good return by owning government bonds, which if you hold those to maturity, you're pretty much guaranteed a pretty decent return.
- [05:43]
Alex Osola
But Sam says that at least for now, higher borrowing costs seem to be more of an inconvenience to consumers than a real threat to economic growth.
- [05:50]
Sam Goldfarb
The economy is kind of being propped up by all this historic investment in artificial intelligence infrastructure. Companies that are doing that investments are facing higher borrowing costs and they're actually doing a lot of borrowing right now. They just are continuing to borrow. They're not slowed by this increase in borrowing costs because they see the potential returns of these investments as being so large and that continues to propel economic growth.
- [06:12]
Alex Osola
Sam points out that consumers have kept on spending despite those higher borrowing costs, though that could change at any time. And speaking of borrowing costs, mortgage rates rose to their highest level in almost a year. Freddie Mac says the 30 year fixed rate averaged 6.58% this week. But there's some good news for working class Americans. Pay is rising. There's new federal data out about the second quarter. It shows that for workers at the 25th percentile of earnings, that's the lower end of the scale. Weekly pay rose 5.5% from a year earlier for workers who are at the median earnings. Percentile pay rose 4.6%. So a bit less. But Americans with lower incomes are more sensitive to higher prices than wealthier people. And inflation could outweigh the benefits of those pay gains. Coming up, earnings from intel and Blackstone plus after its disappointing earnings report. Where IBM goes from here. That's after the break.
- [07:12]
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- [07:46]
Alex Osola
In earnings. Intel's second quarter beat analyst expectations. Sales rose 25% to $16.1 billion and its sales outlook for this quarter also beat analyst expectations. Its Stock is up 12% in after hours trading. Earnings for investment firm Blackstone surged last quarter. It gained from its investments in the AI buildout across all its major businesses. Stronger inflows in its private equity and other businesses helped offset a slowdown in its private credit unit where individual investors have pulled back. And IBM is dealing with the fallout from its disappointing second quarter earnings. Today its stock price was up slightly, adding 0.4%. But it hasn't recovered from its one day loss of 25%, the worst day in the company's 100 year history. That happened last week because IBM gave investors an early warning that its second quarter had been a bust. But now the full earnings report is giving more insight into where the company went wrong and where it could go from here. Journal reporter Anissa Gardizzi is here now to discuss. Okay, Anissa, what did go wrong last quarter for IBM?
- [08:52]
Anissa Gardizzi
IBM's major problem in the second quarter was just how bad their earnings results were and the fact that it was a surprise to management. Right at the end of June, IBM, IBM failed to close tens of deals that amounted to hundreds of millions in revenue. The reason for that was those customers were spending on higher priority items like AI infrastructure, servers and memory and trying to get ahead of rising prices in another market. And it surprised management that these deals didn't close. CEO Arvind Krishna also said he thinks it surprised customers that they had to make these last minute changes and so that is why the company came in way under expectations.
- [09:30]
Alex Osola
Right. He told the Journal's tech columnist Christopher Mims today that many of those deals are likely to close.
- [09:35]
Christopher Mims
The fact that already a third of them closed in like three weeks is much faster than typical. So it was truly then a deferral on those deals and I expect it's not yet done that 80% of them will close within six months.
- [09:49]
Alex Osola
But Anissa, IBM's also cutting its revenue guidance for the whole year to a range between 4 and 5%, down from its previous prediction of 5%. What was the investor reaction to that?
- [10:00]
Anissa Gardizzi
We had reported that it wasn't clear if IBM would even issue any new guidance. But I think the range did instill some confidence and management was very specific that that 4% is on the low end of the range. They're not shooting for 4%. They're still shooting for 5 and they think that's pretty close to Their original guidance, IBM had kind of warned everyone for the worst of it, but their infrastructure business was down 7%. And people already knew about that 7% number. But one interesting stat that they showed yesterday was that the mainframe part of that business was actually down 42%. And I've spoke with a few people who were surprised at just how poorly the mainframe business did.
- [10:38]
Alex Osola
How important is the mainframe business to IBM overall?
- [10:41]
Anissa Gardizzi
It's extremely important to IBM's infrastructure story. IBM is not a typical cloud provider like a Google Cloud or an Amazon Web Services, but they have a stronghold on the mainframe business. They sell to enterprise customers who haven't yet moved some of their most important workloads to the cloud. And investors believed IBM when they said that AI was a tailwind for them and that customers really needed to buy more mainframes, that they could do more AI. But as we saw last quarter, that actually wasn't the case, and IBM became discretionary spending for customers.
- [11:15]
Alex Osola
Yesterday, IBM CEO Arvind Krishna said that the company is in the, quote, early innings of a structural shift for business. But what does that mean? Mean, I mean, where could the company go?
- [11:25]
Anissa Gardizzi
Luckily for IBM, the CEO was kind of referring to this reality, which is that a lot of large enterprises don't yet know how they're going to leverage AI. So in a way, it's giving IBM a little bit of time to figure it out. A lot of enterprises are still using IBM for mainframes because that's where a lot of their most important workloads are, where banks are processing transactions and where enterprises are processing employee data and accounting data. So they don't expect that to move overnight. But AI is definitely a reason that it could move.
- [11:56]
Alex Osola
That was Journal reporter Anissa Gardizzi. Thanks, Anissa.
- [11:59]
Anissa Gardizzi
Thanks.
- [12:00]
Alex Osola
And in other tech news, the European Union has fined Google $1 billion. The European Commission today said that Google favored its own services on its search engine and that Google also restricted app developers from freely steering users to other offers. Outside of Google's Play Store, Google said the EU's rules are making its product offerings in Europe worse. And that's what's news for this Thursday afternoon. Today's show is produced by Danny Lewis with supervising producer Talia Bell. I'm Alex Osoloff for the Wall Street Journal. We'll be back with a new show tomorrow morning.
- [12:32]
Lara Seligman
Thanks for listening.