Goldman Sachs sees AI and budget pressures persisting for North American IT firms in Q3

Goldman Sachs expects North American IT services companies to report stable, in-line Q3 2025 results, reflecting continued enterprise client caution as they balance AI infrastructure investments with limited discretionary budgets. The firm notes that IT spending remains heavily tilted towards efficiency-focused projects, and investor sentiment is weakening as AI is increasingly viewed as a structural challenge. Despite this cautious outlook, Goldman highlights IBM and EPAM as top picks, citing IBM's anticipated software growth re-acceleration and z17 mainframe sales, and EPAM's operational strength and early AI revenue contributions.

Analysis

Goldman Sachs anticipates North American IT services firms will report largely in-line Q3 2025 results, reflecting persistent caution among enterprise clients. Businesses are balancing necessary AI infrastructure investments against constrained discretionary budgets, leading to a focus on efficiency-driven IT spending rather than new growth initiatives. Management commentary is expected to remain reserved due to ongoing macro uncertainty, policy shifts, and tariffs.

Investor sentiment for the sector is deteriorating, with AI increasingly viewed as a structural headwind rather than an immediate growth catalyst. This shift in perception contributes to the overall cautious outlook despite some early signs of discretionary recovery in select verticals. The market impact is assessed as moderate, with a mixed general sentiment.

Despite the broader caution, Goldman Sachs highlights International Business Machines (IBM) and Epam Systems (EPAM) as top picks. IBM is positioned for software growth re-acceleration into low double-digits in H2 and strong z17 mainframe sales, though elevated investor expectations from recent AI and quantum announcements could set a high bar. EPAM is expected to deliver solid performance with a potential 2025 guidance uptick, driven by operational strength and emerging AI revenue contributions.

Key Decisions for Investors

• Monitor broader IT services sector performance for signs of discretionary budget recovery or shifts in AI perception, as Goldman Sachs indicates a cautious outlook and deteriorating investor sentiment.
• Consider selective positioning in high-conviction names like IBM and EPAM, given Goldman's positive outlook on their specific growth drivers and operational strength.
• For IBM, be mindful of potentially elevated investor expectations following recent AI and quantum announcements, which could influence post-earnings stock performance.