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As of Wednesday, shares of Microsoft (MSFT) rallied for nine consecutive sessions to a 3-1/2 month high and are just below their record high from mid-July. Microsoft has rallied +50% this year and +58% in the last 12 months, making it the top performer of the seven megacap technology stocks this year. The rally has pushed Microsoft’s market capitalization to $2.7 trillion, just below Apple’s $2.84 trillion as the biggest public company.
The latest leg higher in Microsoft came after the company reported earnings late last month for fiscal Q1 that were better than expected. Microsoft also reported strong Q1 sales, bolstered by cloud-computing growth amid demand for its new artificial intelligence products. Also, Microsoft CEO Nadella said the company is revamping its entire product suite, including Office, Windows, search, and security software, to add features based on OpenAI technology.
Microsoft is seen as a leader in artificial intelligence (AI), and the growth it has received from AI has contributed to rising earnings estimates for the company. According to Bloomberg data, Microsoft’s full-year net earnings estimates have risen by +2.4% over the past month, and revenue estimates are up +2.8% over the same period. With its stock price near a record high, Microsoft’s valuation is elevated as it trades at 30.5 estimated earnings, just below a recent peak of 32.5 and at a sizeable premium to its long-term average.
Market sentiment for technology stocks has recently improved on speculation that the Fed may be finished raising interest rates, knocking Treasury yields lower. Alliance Global Partners is optimistic in the near-term outlook for technology stocks, saying Microsoft’s recent earnings results “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.”
Some analysts are concerned that the recent bullishness in Microsoft may be overdone. The latest data from Bank of America for September shows 91% of funds own Microsoft, making it one of the most crowded stocks in the tech sector. Also, Cresset Capital said investor enthusiasm for Microsoft “is well founded,” but megacap technology stocks “remain fully valued, and future earnings growth expectations could be in doubt.” Tech sector valuation premium to the S&P 500 ($SPX) (SPY) 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.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.