Microsoft remains fundamentally strong as yields pressure AI valuations

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Microsoft remains fundamentally strong as yields pressure AI valuations

AI spending remains the key valuation question

The key question now is whether Microsoft can turn its AI infrastructure buildout into additional revenue quickly enough. The market is not concerned about a lack of demand as such, but rather about the enormous scale of commitments related to data centers, energy, and computing capacity.

Bernstein, for example, maintains a much more optimistic view and values MSFT at $660, noting that the shares are trading at roughly 25 times forward P/E compared with a historically higher valuation of around 33. Analysts also point out that a significant portion of future infrastructure commitments is spread over several years, while AI still accounts for only part of Microsoft Cloud, meaning that further Azure growth does not depend exclusively on generative AI.

At the same time, there are signs that the physical rollout of new capacity may face constraints related to construction and power supply, making the pace of data center deployment one of the key risks for the coming quarters.

Strong U.S. PMI data keep pressure on Treasuries

The macroeconomic backdrop today has been rather negative for MSFT and other expensive technology stocks. The preliminary U.S. S&P Composite PMI for August rose to 56.0 from 54.5, while the Services PMI accelerated sharply to 56.8 from 54.6, pointing to a noticeable strengthening of activity in the largest sector of the U.S. economy. The Manufacturing PMI, by contrast, declined to 53.2 from 53.9, but remained comfortably above the 50 threshold that separates expansion from contraction. Taken together, the data show that the U.S. economy remains highly resilient, especially due to the services sector, and reduce the need for the Fed to move quickly toward a more accommodative policy stance.

For Microsoft, such data have a mixed effect. On the one hand, strong economic activity supports corporate IT budgets and demand for Azure, cloud services, and AI products, which is positive for the company’s fundamental outlook. On the other hand, unexpectedly strong Composite and Services PMI readings increase the risk that inflationary pressure remains persistent and that Fed rates stay high for longer. It is this second factor that may have a stronger impact on MSFT through the bond market.

U.S. Treasury yields have received an additional reason to remain near elevated levels after the strong PMI data. For Microsoft, this is particularly important after the massive increase in AI infrastructure spending: a high 10-year Treasury yield increases the discount rate and at the same time makes expensive technology stocks less attractive relative to risk-free bonds. Therefore, even with very strong Azure figures and a large commercial backlog, the market may be reluctant to expand MSFT’s valuation multiple until yields begin to decline on a sustained basis.

$480 remains the key near-term support

As a result, Microsoft’s fundamental picture remains strong, but today’s macro signal rather increases short-term risks for the shares. A strong services sector confirms the resilience of corporate demand, but at the same time supports the scenario of rates remaining high for longer. Therefore, the next move in MSFT will depend on whether Azure growth and AI monetization can outweigh pressure from Treasuries and more hawkish expectations for Fed policy.

For now, the MSFT share price remains under selling pressure, but support around the $480 level is still holding back sellers, preserving the chances of a rebound toward $492-500, where, as I noted in Microsoft rebounds as Treasury buybacks ease pressure on valuations, moderate selling may emerge. A loss of this support would lead to a decline toward $468-460, although buyers could become more active from those levels.

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