Microsoft faces deeper correction as investors assess AI spending risks

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Microsoft tests support before quarterly earnings

Quarterly earnings will test Azure growth expectations

The main upcoming event for Microsoft will be the release of its fiscal first-quarter 2027 results on October 28 after the U.S. stock market closes. According to current consensus forecasts, analysts expect revenue to increase to approximately $90.6 billion from $77.7 billion a year earlier, while earnings per share could rise from $4.13 to $4.71. This implies revenue growth of almost 17% and earnings growth of approximately 14%.

In the previous quarter, Microsoft reported revenue of $90.01 billion and earnings of $4.74 per share, exceeding market expectations. However, after the strong recovery in the share price, simply beating forecasts is no longer enough for investors. Particular attention will be paid to Azure's performance, the pace of commercial adoption of Copilot, operating margins, and the company's ability to generate growth in free cash flow amid massive spending on artificial intelligence infrastructure.

Strong results from the previous quarter confirm sustained demand for Microsoft's cloud infrastructure. Intelligent Cloud revenue increased by 32% to $39.3 billion, while Azure and other cloud services posted growth of 43%. At the same time, Azure's annual revenue exceeded $100 billion for the first time, the number of paid Microsoft 365 Copilot seats reached 30 million, and the remaining commercial performance obligations increased to $678 billion.

Capital expenditures raise questions about future profitability

However, the rapid expansion of AI infrastructure requires substantial investment: capital expenditures amounted to approximately $41 billion in the last quarter alone and reached around $145 billion for the full fiscal year. This creates a certain contradiction between accelerating revenue growth and free cash flow prospects.

Despite the short-term correction, analysts' expectations for Microsoft remain predominantly positive. In recent days, TD Cowen raised its price target for the stock to $625, Mizuho to $600, UBS to $675, Jefferies to $650, and Citi to $636. The main argument is the company's ability to generate revenue simultaneously from Azure, corporate Microsoft 365 subscriptions, and the integration of AI agents into clients' workflows.

At the same time, the development of Copilot and the expansion of computing capacity should provide additional sources of revenue in fiscal 2027. However, after the shares gained approximately 40% since July, a significant portion of positive expectations is already reflected in the price. Therefore, even strong quarterly results could trigger profit-taking if management provides more cautious forecasts for capital expenditures, margins, or the payback periods of new data centers. An additional risk remains the dependence of cloud business expansion on electricity availability, advanced accelerators, and the timely commissioning of new computing capacity.

Market uncertainty puts key support at risk

The broader market environment on October 22 is also contributing to position reductions in technology companies. Following yesterday's rise in U.S. stock indices, investors have once again shifted their attention to the risks of overvaluation in the AI sector and geopolitical uncertainty. The yield on 10-year U.S. Treasuries declined to approximately 5.04%, while the 2-year yield fell to 4.73% amid renewed demand for safe-haven assets. However, lower yields have yet to support technology stocks, as market participants are primarily concerned about the scale of future investments and their impact on corporate earnings.

Nevertheless, the bulls' inability to break through resistance around $540–550 triggered profit-taking on long positions, against which bears are attempting to break below support at $525. The decline in MSFT's share price could still attract buying interest; a break below the current support would lead to a decline toward $510–500, where, as stated in Microsoft holds near $531 amid sector correction and earnings expectations, buying opportunities may also emerge.

In the event of active U.S. military operations against Iran, a deeper decline in MSFT is possible.

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