(Bloomberg) — The S&P 500 Index has had a fitful 2026 as it aims for a fourth-straight year of double-digit percentage gains, something it hasn’t done since the 1990s, while contending with risks from the war in Iran and rising inflation.
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But one high-profile culprit is most responsible for holding back the market: Microsoft Corp. The software giant is down 12% this year, making it by far the biggest drag on the index’s 8.3% gain, according to data compiled by Bloomberg. While Meta Platforms Inc. and Tesla Inc. are the next closest, their moves amount to a fraction of Microsoft’s weight.
Microsoft shares were up slightly Thursday after the Information reported that Anthropic is in early talks to rent servers powered by Microsoft-designed AI chips.
The stock has otherwise been struggling amid tepid results from Microsoft’s cloud-computing division, which fueled concerns about the company’s position in the artificial intelligence landscape and caution about the scale of its AI-related spending. It also has gotten caught up in investors’ broader angst about software’s growth potential in an AI world.
“There are a lot of problems Microsoft has to solve, a lot of questions where we haven’t gotten good answers on its ability to successfully transition into a more AI-forward company,” said Howard Chan, chief executive officer at Kurv Investment Management, which owns Microsoft shares. “Its death has been exaggerated many times, and with sentiment so negative we see more upside than downside. But until we get answers, I don’t think it’s going to be smooth sailing.”
Meanwhile, the two other major players in cloud computing, Alphabet Inc. and Amazon.com Inc., are putting up double-digit percentage gains in 2026. With the Nasdaq 100 Index rising 15% in 2026, Microsoft is on pace for its third-straight year trailing the tech-heavy benchmark, and if the gap between the two lasts through the end of December, it would mark the most severe underperformance since 2003.
Microsoft’s earnings report in late April pointed to underwhelming growth in its Azure cloud computing business, especially relative to Alphabet and Amazon, which “suggests that peers see greater AI traction,” Bloomberg Intelligence analyst Anurag Rana wrote in a research note at the time. It also forecast $190 billion in capital expenditures through the end of December, more than Wall Street was expecting.
The spending and cloud issues come at a time of growing concern for all software companies due to the potentially disruptive impact of AI. Investors fear that legacy products could be replaced by services from companies like Anthropic and OpenAI, and that consumers will be able to use AI to “vibe code,” or write their own programming.
“I don’t think AI will fully replace Word or Excel, but those tools are a major pipeline for selling compute with Azure,” Chan said. “It has to improve multiple parts of its business at once. And the hurdle and challenge of that is higher.”
That said, Wall Street remains confident that Microsoft ultimately will figure out AI with a strategy that succeeds. The company is expected to post a 17% increase in revenue in fiscal 2026, which ends in June, up from 15% in fiscal 2025. While the figure is projected to slow slightly in fiscal 2027, it’s expected to re-accelerate in the subsequent two years.
The outlook for net income is a bit dicier, with growth of 26% anticipated in fiscal 2026, and then slowing to 12% in 2027 before rising again from there. Over the past 12 months, analysts have been raising their estimates for Microsoft’s future earnings and revenue fairly aggressively.
Billionaire investor Bill Ackman disclosed last week that his firm, Pershing Square, had built a $2.1 billion stake in Microsoft while selling down its Alphabet holdings. He lauded Microsoft 365 business products and said concerns about growth are “misplaced.”
Surely one attraction was Microsoft’s shrinking valuation. The stock trades at 22 times estimated earnings, down from 35 in July 2024 and a discount to the 10-year average of about 27. In late March, the multiple sank below 20, its lowest level since 2016.
The combination of durable growth and a lower valuation is why Microsoft remains one of the most popular stocks on Wall Street. Of the 71 analysts tracked by Bloomberg who follow the company, 67 have buy ratings. And the average price target projects the shares will rise 32% over the next 12 months, the second-strongest return profile among the Magnificent Seven, after Meta Platforms.
Tom Plumb, manager of the Plumb Balanced Fund, is among the investing pros who thinks this year’s selloff has gotten overdone. Microsoft is one of the fund’s top holdings.
“Results have been lumpy, and it may take a couple more quarters until we see stronger organic growth, but I think the challenges have been overstated,” he said. “People are acting like they’re afraid to hold it, but right now you’re getting above-market growth for basically a market multiple. If you get in now, I think you’ll be rewarded two years out.”
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Nvidia Corp., facing more investor skepticism, used its latest quarterly report to tout progress in diversifying the company, which aims to rely less on the giant data center operators that have fueled its runaway growth.
SpaceX filed publicly for what stands to be the largest-ever initial public offering, revealing billions in losses and a super-voting share plan allowing Elon Musk to keep the company under his control.
Musk’s legal battle against OpenAI has hung over the ChatGPT maker for more than two years, threatening to unravel its restructuring as a for-profit business and undermine its plans to go public. Now that a judge dismissed the billionaire’s case, OpenAI appears intent on moving ahead with its Wall Street debut.
Anthropic PBC is on pace for its first profitable quarter after experiencing a surge in revenue driven by demand for its artificial intelligence software.
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–With assistance from Subrat Patnaik, David Watkins and Neil Campling.
(Updates to market open, adds Information report.)
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