What Happened?

Shares of tech giant Microsoft (NASDAQ: MSFT) jumped 2.6% in the afternoon session after investor optimism continued as the company received a series of analyst price target upgrades. The move followed the company's strong fourth-quarter earnings report from the prior week. On July 30th, the technology giant posted revenue of $76.4 billion and earnings per share of $3.65, which surpassed analysts' estimates. The growth was powered by a significant jump in its Azure cloud business, driven by strong demand for artificial intelligence. Microsoft also announced plans for a record $30 billion in capital spending for the first quarter, signaling a commitment to expanding its AI infrastructure. In response to the strong performance and outlook, several analysts, including those at Truist, UBS, and Jefferies, increased their price targets for the stock. 

Also, a surprisingly weak July jobs report fueled expectations that the Federal Reserve would cut interest rates to support the economy. Data released on Friday showed the U.S. economy added only 73,000 jobs in July, significantly below forecasts, with downward revisions to previous months compounding concerns of a slowdown. This weaker-than-expected economic data is paradoxically lifting investor spirits. The logic follows a 'bad news is good news' narrative, where a faltering labor market could compel the Federal Reserve to act sooner to stimulate the economy. 

Following the report, the probability of an interest rate cut at the Fed's September meeting surged, with the CME FedWatch tool indicating traders now see an 85% chance. Lower interest rates generally reduce borrowing costs for companies and consumers, which can encourage spending and investment, thereby boosting stock prices. The rally comes after a sharp sell-off last week driven by the same jobs data and new tariff announcements.

After the initial pop the shares cooled down to $534.35, up 2% from previous close.

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What Is The Market Telling Us

Microsoft’s shares are not very volatile and have only had 4 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.

The previous big move we wrote about was 4 days ago when the stock gained 4.5% on the news that the company reported impressive fiscal fourth-quarter earnings that surpassed analyst expectations, fueled by significant growth in its cloud and artificial intelligence divisions. The tech giant's Intelligent Cloud segment saw revenue increase by 26% to $29.8 billion, with its Azure cloud platform leading the charge. Management highlighted strong customer adoption of AI-powered services and forecasted record spending to further build out its AI infrastructure. Microsoft revealed that Azure and its associated cloud services brought in over $75 billion in the past fiscal year, marking a 34% increase from the previous year. In a clear indication of its commitment to AI, Microsoft announced plans to invest over $30 billion in capital expenditure in the next quarter alone to enhance its AI infrastructure.

Microsoft is up 27.7% since the beginning of the year, and at $534.35 per share, has set a new 52-week high. Investors who bought $1,000 worth of Microsoft’s shares 5 years ago would now be looking at an investment worth $2,505.

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