In a remarkable display of strength, Microsoft Corporation led a resurgence in the technology and internet stock market, propelling the Nasdaq to record highs and adding approximately $1.5 trillion in market value in recent days. The surge in Big Tech stocks suggests that a period of skepticism surrounding the valuations of these market leaders may be coming to an end.
Microsoft’s impressive performance
Microsoft’s stock price soared to a record high on Wednesday, capping off a nine-day rally, marking its longest winning streak in about four years. Since the end of September, Microsoft shares have seen an impressive gain of around 15%, positioning it as the top performer among the seven megacap companies responsible for this year’s market gains. This surge has propelled Microsoft’s market capitalization to a staggering $2.69 trillion, not far behind Apple Inc., which boasts a market capitalization of $2.85 trillion, making it the largest public company.
Microsoft’s stellar performance follows the release of its quarterly results, which showcased a rebound in cloud growth driven by soaring demand for artificial intelligence (AI) products. This resurgence in cloud business has made Microsoft a standout performer amid a mixed earnings season for megacap companies.
Tech sector confidence rebounding
While concerns about the valuation and growth prospects of the tech sector were prevalent leading up to this earnings season, recent results, including Microsoft’s, have renewed confidence in the industry. Alphabet Inc.’s tepid cloud results and Apple’s disappointing sales in China had raised doubts, but the sentiment seems to be shifting in a more positive direction.
One factor contributing to this shift is a more optimistic view of monetary policy, with the latest jobs report suggesting that the Federal Reserve may refrain from further interest rate hikes. As a result, Treasury yields have retreated from multi-year highs, alleviating a significant headwind that had been negatively impacting tech valuations.
Analyst and investor sentiment
Investment professionals and analysts alike are expressing growing optimism about the tech sector’s prospects. Jonathan Cofsky, portfolio manager at Janus Henderson Investors, highlighted Microsoft’s strengths, stating that it “checks the most boxes” and possesses a resilient business model, AI leadership, and strong secular tailwinds with fewer secular risks compared to other companies.
Mark Martiak, managing director of investments at Alliance Global Partners, believes that tech is poised for a resurgence, supported by improved fundamentals and a more favorable economic backdrop. Moreover, Oppenheimer and Truist Advisory Services have both endorsed the tech sector, citing strong balance sheets, cash flow generation, and earnings potential as key drivers for continued outperformance.
UBS Global Wealth Management echoed these sentiments, asserting that fears over tech fundamentals are unfounded, as earnings growth is expected to support further outperformance. Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management, emphasized the positive long-term outlook for AI and the software industry, particularly bolstered by Microsoft’s leadership in AI.
Microsoft’s AI leadership
Microsoft’s position as a leader in AI has played a pivotal role in its recent growth. This leadership has led to upward revisions in the company’s estimates, with full-year net earnings estimates rising by 2.4% over the past month and revenue estimates increasing by 2.8% over the same period.
However, despite these positive developments, Microsoft’s return to record highs has raised concerns. The stock currently trades at 30.5 times estimated earnings, below a recent peak of 32.5 but still at a significant premium to its long-term average. Additionally, its heavy weighting in major indexes suggests that a substantial portion of potential investors may already hold the stock. According to Bank of America data from September, 91% of funds owned Microsoft, making it one of the most crowded stocks in the sector.
Jack Ablin, Chief Investment Officer at Cresset Capital, advises tempering expectations, noting that while enthusiasm is warranted, megacaps remain fully valued, and future earnings growth expectations could be in doubt. He pointed out that historically, tech has struggled to outperform the market over the subsequent 12 months at such wide valuation differentials.
