Microsoft’s Meteoric Rise: Can it Sustain Leadership Among Megacap Tech Stocks?

Microsoft Stock

In a remarkable streak, Microsoft (NASDAQ:MSFT) shares surged for nine consecutive sessions, reaching a 3-1/2 month high just below their mid-July record. With a remarkable 50% surge this year and an impressive 58% climb in the last 12 months, Microsoft stands out as the top performer among the seven mega-cap technology stocks.

The rally propelled Microsoft’s market capitalization to $2.7 trillion, trailing only Apple at $2.84 trillion as the largest public company. The latest upswing followed better-than-expected earnings in fiscal Q1, with strong sales fueled by the growth in cloud computing and demand for new artificial intelligence products. CEO Nadella announced a comprehensive revamp of Microsoft’s product suite, incorporating features based on OpenAI technology into Office, Windows, search, and security software.

Recognized as a leader in artificial intelligence, Microsoft’s growth in this realm has contributed to a +2.4% increase in full-year net earnings estimates and a +2.8% rise in revenue estimates over the past month, according to Bloomberg data. Despite its stock trading near a record high, Microsoft’s valuation is elevated at 30.5 estimated earnings, just below a recent peak of 32.5 and at a significant premium to its long-term average.

While market sentiment for technology stocks has improved amid speculation that the Fed may halt interest rate hikes, concerns arise about the exuberance surrounding Microsoft. Bank of America’s September data reveals that 91% of funds own Microsoft, making it one of the most crowded stocks in the tech sector. Cresset Capital acknowledges well-founded investor enthusiasm but warns that megacap tech stocks are fully valued, raising doubts about future earnings growth expectations. The tech sector’s historical challenges in outperforming the market over the subsequent 12 months at such wide valuation differentials add to the cautionary notes.

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