Wall Street’s so-called Magnificent Seven has been living up to its name again, but none more so than Microsoft Corp.
The software giant has led a broad rebound in the biggest technology and internet stocks and closed at a record high on Wednesday. The rally in Big Tech has helped add about $1.5 trillion in market value to the Nasdaq 100 in recent days, suggesting a period of skepticism surrounding the pricey market leaders may be ending.
“When it comes to what you want to see, Microsoft checks the most boxes, and checks them the most emphatically,” said Jonathan Cofsky, portfolio manager at Janus Henderson Investors. “It has a resilient business model, it is executing extremely well, it is a clear winner in AI, and overall it has the most secular tailwinds and fewer secular risks than other companies.”
Microsoft dipped 0.3% on Thursday, coming off a nine-day rally, its longest winning streak in about four years. The shares have gained around 15% since the end of September, making them the top performer among the seven megacaps that have powered the market’s gain this year. The advance has resulted in a market capitalization of $2.69 trillion, not far from Apple Inc., which at $2.85 trillion is the biggest public company.
The stock advance follows Microsoft’s results, which showed a rebound in cloud growth amid demand for artificial intelligence products, making it a highlight of an otherwise mixed season for megacap earnings.
While Wall Street never exactly soured on big tech, there were concerns about the group’s valuation and growth potential going into this earnings season. Those fears saw some validation in Alphabet Inc.’s tepid cloud results, or weak sales for Apple out of China.
Now, however, sentiment seems to be shifting back. Part of that reflects a rosier view of monetary policy, as the latest jobs report suggested the Federal Reserve may be done raising rates. That has led to Treasury yields retreating from multi-year highs, easing what had been a major headwind to tech valuations.
“I think we’ve seen a peak in Treasury yields, which will help with sentiment, especially for tech,” said Mark Martiak, managing director of investments at Alliance Global Partners.
He added that results like Microsoft’s “suggests we’re past the worst, in terms of fundamentals,” and that “this combination of better fundamentals and a more favorable backdrop suggests tech can not only resume its leadership role but keep it over the rest of the year.”
He’s not alone in that view. Oppenheimer named buying tech its top idea for the end of the year, while Truist Advisory Services upgraded the sector earlier this week, writing that its “strong balance sheets, cash flow generation, and earnings should continue to support outperformance.”
UBS Global Wealth Management concluded that based on this earnings season, “fears over tech fundamentals are unjustified,” as earnings growth should continue to support outperformance. “The quarterly results reinforce our long-term positive view on AI and the software industry in particular,” wrote Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management.
Microsoft is seen as a leader in AI, and the growth lift it got from this has contributed to rising estimates for the company. Full-year estimates for the company’s net earnings have risen by 2.4% over the past month, while revenue estimates are up 2.8% over the same period, according to data compiled by Bloomberg.
Still, the stock’s return to a record suggests that hopes remain high. Microsoft trades at 30.5 times estimated earnings, below a recent peak of 32.5, but at a sizable premium to its long-term average. Furthermore, its weight in major indexes could mean that almost everyone who wants to own it already does. According to the latest data from Bank of America, which is for September, 91% of funds own Microsoft, and it is among the most crowded stocks in the sector.
To Jack Ablin, chief investment officer at Cresset Capital, these are reasons to temper one’s expectations.
Investor enthusiasm “is well founded,” but megacaps “remain fully valued and future earnings growth expectations could be in doubt,” he wrote. The sector’s valuation premium to the S&P 500 is “not unheard of,” but “historically, tech has had a tough time outperforming the market over the subsequent 12 months at such wide valuation differentials.”