US IT hardware stocks tumble as Morgan Stanley flags slowing demand

(Reuters) - US IT hardware stocks dropped on Tuesday after Morgan Stanley downgraded the sector, warning of slowing demand as companies rein in spending amid economic uncertainty and rising component costs.

The Wall Street brokerage said corporate technology leaders dialing back hardware spending plans adds to existing concerns over higher input costs and supply bottlenecks, cutting its industry view to "cautious" from "in line."

"A 'perfect storm' of slowing demand, input cost inflation and rich valuations is emerging, leading us to get more defensive into 2026," the analysts wrote.

The sector wide selling dragged the IT hardware index down 1.1% at the open amid broader market weakness.

Morgan Stanley's latest survey pointed to just 1% year-on-year growth in hardware budgets in 2026, the weakest non-COVID reading in about 15 years.

A separate survey by the brokerage of value-added resellers indicated 30% to 60% of customers may reduce planned purchases of PCs, servers and storage if price hikes tied to component inflation persist.

While AI-driven demand has been a tailwind for hardware manufacturers, uncertainty from President Donald Trump's tariffs has weighed on the sector.

Citigroup analysts on Monday said hardware companies and distributors face choppier enterprise demand, rising memory costs and softer PC shipments into 2026.

"With higher costs and elastic demand comes greater risk of downside earnings estimate revisions in 2026," Morgan Stanley said.