Our mid-year forecast for 2024 global IT spending is mostly unchanged at 8.2% growth, similar to our January 2024 forecast of 7.9% (see Industry Credit Outlook 2024: Technology, published Jan. 9, 2024; see also table 1). Under the hood, however, trends are emerging that we had not anticipated six months ago. Enterprise spending is weaker than expected through mid-2024 as companies scrutinize traditional IT budgets to make room for AI projects. We expect most hardware segments, sans servers, to be generally weaker than previously forecasted as a result. Personal computers (PC) and smartphone sales are rebounding after a weak 2023, but the latter is outperforming the former in contrast to our previous forecast. Separately, we estimate large cloud service providers (CSPs) will ratchet up their capital spending by 40% in 2024 to retool their data centers in anticipation of greater generative AI workloads, thereby improving the outlooks for select semiconductor and hardware makers. In fact, the semiconductor outlook is much stronger than previously thought as AI beneficiaries, such as NVIDIA Corp. and Broadcom Inc., and rapidly improving memory fundamentals push our forecast to 18% growth compared to 14% previously. While AI investments have yet to drive significant revenues, we forecast large CSPs will continue to generate strong cloud-related revenue growth in excess of 20% this year and contribute to an overall strong IT services growth, now forecasted at 8% rather than the 7% we expected earlier. The software outlook has softened modestly, as enterprises have become more cautious and are subjecting budgets to increased scrutiny, but we still expect software spending to grow about 10% in 2024.

Our global IT growth forecast assumes stronger spending in the second half of the year versus the first half. Enterprises entered 2024 with a still-cautious view given the muted macroeconomic expectations, delaying some noncritical, long-term projects while continuing their transition to the cloud and slowly ramping up investments in nascent generative AI projects. Commercial and small- to midsize business spending has been even weaker. We now see signs that enterprise spending is gradually recovering across most of our subsectors as management teams have more confidence in the macroeconomic environment than they did six months ago. Dell Technologies Inc., for example, saw improving demand for traditional servers from large enterprise customers in its April quarter. Also supporting our growing second-half optimism is the overall resilient economic outlook. S&P Global recently revised its global GDP growth forecast to 3.3%, higher than the 2.8% forecasted at the beginning of the year. The U.S. economic outlook improved the most, with S&P Global now forecasting 2.5% GDP growth compared with 1.5% earlier.

AI investments, while still in early stages, is already having a positive impact on overall IT budgets. Large CSPs' investments in AI are noteworthy. We now expect large U.S. CSPs to increase their capital spending by 40% in 2024, compared with our previous estimate of about 30%. Resilient cloud revenue growth by Microsoft Corp., Amazon.com Inc., and Alphabet Inc.'s Google Cloud supports such increased spending expectations, in our view. Enterprise customers are signing longer and larger deals, and AI proof of concepts are moving into production. New workloads and cloud migrations are also contributing to the demand. For enterprises, we believe funding for AI is coming from both traditional IT budgets and net new budgets. This has somewhat cannibalized traditional hardware budgets, and to some extent, software budgets, as customers sweat their assets longer and reallocate some spending away from software. At the same time, AI represents expansion of overall IT budgets as new revenue and cost-savings opportunities are realized. We expect the market for AI, including traditional AI (such as machine learning) and generative AI, will expand from less than $200 billion in 2023 to nearly $650 billion by 2028, equivalent to a compound average growth rate (CAGR) in the high-20% area, and will account for nearly 15% of total global IT spending by 2028 (see chart 1). As workloads move to the public cloud at an accelerating pace, we believe on-premise spending will continue to come under pressure.

We believe spending on IT as a percentage of global GDP will increase significantly over the next decade, leading to improved growth prospects and better rating trajectories for many technology sector issuers. At the same time, this growth path will be uneven. Large CSPs are currently investing to procure the GPUs required to expand their AI infrastructure, yet their spending patterns are historically lumpy. They have, in the past, extended the useful life of data centers and pushed back product upgrades when faced with weak demand or budget constraints. Failure to monetize AI investments in a timely fashion could result in CSPs delaying new orders for multiple quarters. This would create inventory management challenges for semiconductor and hardware providers and increase volatility across the supply chain.

China and supply chain represent another potential risk to healthy IT growth. Geopolitical risks are rising and the U.S.-China strategic confrontation will likely persist irrespective of the U.S. presidential election outcome. If tensions worsen or technology competition intensifies, it could cause bifurcation of the supply chain leading to increased investments and inefficiencies. Restrictive or protectionist trade policies that favor trade restrictions could result in inflationary pressures, especially for the technology sector that is exposed to cross-border supply chains. The Biden Administration had placed export restrictions on advanced semiconductors to limit China's high-performance computing capabilities, particularly for AI and technology that poses the greatest national security concerns. Effective controls imposed by the U.S. could be harmful to U.S. semiconductor and technology firms that sell into China. Former President Trump indicated that, if elected, he would be in favor of a universal baseline tariff of 10% on all U.S. imports and a 60% tariff on all U.S. imports from China. It appears that trade policies by both parties would hamper free trade with China, a major manufacturing hub for the tech global supply chain.

Below we discuss our revised outlooks for four key technology sectors.

Hardware: Lowering our expectations despite strong server rebound.

Server shipments have been much stronger than we had anticipated, mostly owing to AI tailwinds. After declining 19% in 2023 due to tepid enterprise spending, we now forecast server shipments will rebound 12% in 2024, up strongly from 6% previously forecasted. AI server shipments will likely double in 2024, albeit off a small base, while IDC expects traditional server shipments to rebound in 2024 as pent-up demand for a server refresh continues to build among enterprises and CSPs. We note that much of the benefit is accruing to original design manufacturers (ODMs) who produce AI servers for CSPs, but the original equipment manufacturers (OEMs) we rate, such as Dell and Hewlett Packard Enterprise Co., are starting to see significant AI tailwinds from their customer base of tier 2 CSPs and enterprises. We also note that while server units will grow double digits in 2024, total industry revenues will be much higher, perhaps by 50% or more, owing to AI servers' massive sticker prices.

The rest of the hardware categories have mostly underperformed although we expect improvement in the second half of the year compared with the first half. We are lowering our PC shipments forecast to just 1% growth from our previous forecast of 4% because first half 2024 sales have been weaker than expected especially in China, enterprises shifted some traditional hardware budget towards AI projects, and consumer demand has yet to rebound. At the same time, we forecast gradually improving enterprise spending and a PC refresh cycle related to Windows 10 end of life and an aging installed base to improve sales on a year-over-year (YoY) basis through the second half of 2024. The introduction of AI-enabled PCs will provide industry tailwinds in late 2024 and into 2025.

We modestly revised our smartphone shipment forecast to 4% from 3%, given the good momentum (up 7% YoY) in the first half of 2024, according to IDC. Key drivers to the forecast revision include: 1) the first-time introduction of AI features that should gradually catalyze replacement demand; and 2) penetration in new markets such as Latin America and Africa that a few Chinese OEMs are actively exploiting. Samsung Electronics Co. Ltd. sits atop of the global smartphone market at about a 20% share. The company already introduced its AI-capable Galaxy 24 series as well as new Galaxy A series, whose models span the low- to mid-price levels. We expect the company's smartphone shipment to be in line to slightly lower than our expectation of 4% for global smartphone sales in 2024. Yet its phone revenues will benefit from higher average selling price. For Apple Inc., the introduction of its AI platform, Apple Intelligence, represents refresh opportunities for its hardware lineup. We forecast Apple will have flattish YoY phone shipments, based on weaker-than-expected sales in the first half of 2024 (down 4.6% YoY), offset by a potential boost from the debut of its AI-enabled smartphone in later this year. Apple holds 19% of the global smartphone market share (20% in 2023). For Chinese smartphone OEMs, who represent about a half of the global smartphone unit sales, we think a mid-single digit percentage growth is likely in 2024. Their smartphone offerings are broad-based and include low- to mid- to high-end phones. As such, any mild economic weakness experience is more likely to lead to tradedowns to lower-priced phones rather than cancelled purchases.

Chart 1

We expect external storage revenue growth to be near the 4% area in 2024, slightly lower than the 5% previously forecasted given the muted first quarter results. Storage recovery generally lags that of servers, and as Dell indicated in its recent earnings call, we expect storage to return to growth in the second half of the year based on continued demand for high performance flash storage and pent up demand arising from a weak 2023. We do not expect material AI benefits to accrue to storage vendors until 2026. We lowered our forecast for network equipment to negative 6% from negative 3% because of an extended inventory correction, and also lowered our Mobile telecom equipment growth to negative 5% from negative 3% reflecting ongoing weak 5G investments.

Semiconductors: Massive AI and memory growth mask overall tepid industry demand.

Since our semiconductor forecast at the beginning of the year, certain segments have accelerated and pushed our forecast for the industry higher, masking broad-based weakness. We now forecast total semiconductor industry revenues to grow 18% in 2024. However, excluding the memory segment, industry revenue growth is much lower at 8%. Further excluding NVIDIA Corp., we believe industry revenues will actually fall 2%. These figures compare to growth of 14%, 8%, and 3%, respectively, from our forecast at the beginning of the year.

Chart 2

The five percentage point swing in broad markets is due to weaker-than-expected demand in most end markets and some crowding out by AI spending. We continue to believe inventory correction will take longer than expected in the industrial market, which, in our view, is also experiencing some macroeconomic pressure on organic demand. Even the automotive market, which we continue to believe will generate the highest long-term growth due to increasing electronic content and electric vehicle growth, is performing worse than expected. The PC markets are weaker, reflecting budgetary constraints and potentially the deferral of purchases in anticipation of devices with AI features, which are being released in the second half of 2024. This is unlike the smartphone market which is already seeing signs of improvements. Finally, AI spending is cannibalizing spending on general-purpose components in the data center market, a trend that is continuing from last year. NVIDIA continues to be the main beneficiary as CSPs accelerate their investments and we now expect revenue to nearly double in 2024, much better than our forecast from December 2023 for 45% growth.

Our forecast for memory market growth is now around 60% compared to about 40% at the time of our January forecast, which follows a 40% cumulative decline from 2021 to 2023. This puts memory revenue close to what it was in 2021 whereas our previous forecast had it only reaching 2022 levels. Memory inventory is improving and key end markets like PC and smartphones are stabilizing after two years of unit declines. The industry has also maintained supply discipline, curtailing capital spending and idling some excess production capacity. As a result, we have seen a sharp price recovery. AI adds to the upside pressures as demand for high bandwidth memory (HBM)/dynamic random access memory (DRAM) for AI servers ramps up and signs of demand for enterprise solid-state drives emerge. The memory players are repurposing some equipment dedicated to general purpose memory for products that support AI, particularly DRAM, further curtailing general purpose capacity and supporting prices. We expect strong topline growth in 2024 and 2025 for leading memory players such as Samsung Electronics Co. Ltd., SK hynix Inc. and Micron Technology Inc.

Software: Still resilient but facing near term budget scrutiny

We lowered our software industry revenue growth forecast by a tick to 10% from 11%. We believe there has been some reallocation of IT budgets away from software and into AI-related projects. This will pressure some seat-based software-as-a-service (SaaS) companies over the next year or so and potentially accelerate vendor consolidation from point products to platforms, which would harm smaller vendors, in our view. The software industry is experiencing a moderation in demand, with several factors contributing to this trend. Salesforce.com Inc. reported lower current remaining performance obligations (cRPO) growth than initially forecasted, although it maintained optimism for future revenue targets. This softening demand is largely attributed to the macroeconomic environment, which has led to more cautious buying behavior among customers over the past two years. Businesses are taking longer to make decisions, particularly for large transformational deals, and are subjecting budgets to increased scrutiny. This has resulted in lower conversion rates, more "no decision" outcomes, and a general compression of deal sizes. AI has yet to significantly boost software revenue despite it benefitting platforms and component makers.

Europe has been notably weak, while small and midsize businesses, as well as those relying on transactional models, are feeling the pressure more acutely. Workday Inc. guided for deceleration in cRPO growth to 15%-16% next quarter compared with 18% this quarter and it reduced its full-year subscription revenue guidance. This slowdown is closely tied to the overall deceleration in enterprise employment, which directly affects seat-based software sales. Furthermore, IT departments are increasingly focusing their resources on one or two top priorities, leading to weakened demand for projects outside these core areas. As a result, the software industry is adapting to a more measured and selective buying environment, with companies needing to demonstrate clear value propositions to secure deals in this challenging landscape.

Software vendors are holding on until they can bring more AI features to market with demonstrable value-add that can catalyze a resurgence in sales growth. We expect growing AI-related investments in security software to prevent data breaches and identify suspicious activity. We believe large investment-grade issuers, such as ServiceNow Inc. and Salesforce, are seeing solid AI adoption and are well positioned for sustained growth.

IT Services: Near-term benefits from public cloud migration and AI investments

We raised our growth expectation for IT services by a point to 8% for 2024 to reflect solid demand in areas such as digital transformation, public cloud migration, automation, and AI investments. We believe large CSPs will generate robust revenue growth north of 20% in 2024 as enterprises continue their transition to the public cloud and ramp up their AI investments. According to Gartner Inc., 25% of IT services are composed of cloud based platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS) and forecasts this subsegment will grow above 20% in both 2024 and 2025, benefitting leaders like Amazon.com Inc., Microsoft Corp., and Alphabet Inc. To be sure, this growth forecast depends on how much of the future AI workloads will consist of training versus inferencing. We believe CSPs will reap much of the benefit as enterprises rent compute power to both train and inference AI models and ramp AI-enabled applications at scale. On-premise proponents believe that inferencing on-premise can be up to 75% cheaper compared with inferencing in the cloud and that up to 90% of AI compute could be for inferencing by 2030. This would shift some of the IT budget back to legacy OEMs.

The rest of IT services had a slow start in the first half of 2024 with headwinds from macroeconomic conditions, notably budgetary constraints, which remain drivers of sales cycle elongation, cost controls, and vendor consolidation. While these headwinds continue to persist, customer interest in and exploratory efforts around potential AI use cases have served as a demand catalyst for our large issuers for projects related to cloud adoption, data cleansing, workforce productivity, modernizing enterprise business processes, and enhancing data security.

For the remainder of 2024, we expect IT services providers to remain cautious with their overall IT spending budgets while capitalizing on demand for these client services, especially for customers that can longer postpone refresh activity for complex solutions tied to digital transformation. Improving demand trends for consultant services related to technologies have bolstered our views around demand stabilization and spending expectations for the year, relative to our initial expectations. This is evident for large service providers like Accenture PLC, which expects its consulting business to return to growth this quarter, Kyndryl Holdings Inc., which is successfully scaling its consulting offering and CDW Corp., which expects low single-digit percent gross profit expansion for 2024 with modest recovery in the second half of the year. We expect firms with consulting arms focused on digital transformation to experience a quicker recovery than other pockets of IT services, which will need to see engagements mature and transition beyond design to implementation phases.