Microsoft under pressure as AI spending and bond yields weigh on shares

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Microsoft under pressure as AI spending and bond yields weigh on shares

AI investment raises pressure on margins

However, the scale of Microsoft’s AI expansion is becoming both its biggest strength and one of the main risks to the stock’s valuation. Capital expenditures reached $41 billion in the latest quarter, while the company expects CapEx to exceed $50 billion in the current quarter. These investments are necessary to expand data centers, purchase accelerators and meet rising Azure demand, but such aggressive spending is gradually weighing on profitability, with overall gross margin declining to 67% from 69% a year earlier.

Management expects next-quarter revenue in a range of $89.85–90.95 billion, implying growth of roughly 16–17%, while operating margin is expected to remain broadly in line with last year. As a result, the market is now focused less on the fact that the AI business is expanding and more on how quickly rising capital investment can translate into sustainable cash flow and earnings.

Azure and Copilot keep long-term outlook constructive

Fundamental factors remain constructive. Microsoft continues to hold strong positions across several areas of AI monetization, including Azure, Copilot, GitHub, Microsoft 365 and enterprise AI agents, allowing the company to spread investment across infrastructure and high-margin software products.

Another positive factor is the expected acceleration in the commercial business at the start of FY2027. However, Microsoft’s elevated valuation makes the shares sensitive to any slowdown in Azure or signs that AI infrastructure is taking longer than expected to generate returns. At a current P/E of around 28.6, the market is still pricing in continued double-digit earnings growth, meaning even a moderate downgrade to cloud growth expectations could trigger noticeable volatility.

Middle East risks increase downside pressure

The situation in the Middle East is creating an additional source of pressure. As of August 18, talks aimed at normalizing shipping through the Strait of Hormuz remain stalled, with WTI trading near $85 and Brent above $90. Amid fears of another energy-driven inflation shock, the 30-year U.S. Treasury yield has risen to around 5.33%, which is particularly unfavorable for large technology companies whose valuations depend heavily on future earnings.

Against this backdrop, MSFT remains at risk of breaking below its current support and testing the $460–450 area. However, a deeper decline still looks unlikely at this stage. As I warned in Microsoft shares remain supported by Azure and AI growth, a serious escalation of the conflict in the Middle East could nevertheless trigger a broader flight from risk assets, in which case the stock could fall toward $430–410.

A return above $500 would strengthen bullish momentum and open the way for a test of $510–520.

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