Microsoft Stock Is on Track to Trail the S&P 500 for a 3rd Straight Year. History Says What Happened After Its Last 2 Streaks.

Microsoft returned about 13% in 2024 and 16% in 2025, trailing the S&P 500’s roughly 25% and 18%; in 2026 so far it has returned about 9% versus the index’s 15%. Fiscal 2026 EPS rose 32% to $17.95, or 22% excluding the impact of its OpenAI investment, while revenue increased 18% to $331.8 billion. The stock trades near 29 times fiscal 2026 earnings—well above the valuation at the end of its prior lagging streaks—so the article views continued earnings growth, rather than valuation expansion, as the likely route to catching up, and says the streak alone is not a reason to sell.

Analysis

The key question is earnings durability, not whether a third year of relative underperformance predicts a rebound. At roughly 29x trailing earnings, Microsoft has less valuation cushion than at the end of prior lagging streaks; a catch-up trade therefore depends more on sustained operating growth than multiple expansion. The reported EPS increase also deserves a quality check: the article attributes part of it to Microsoft’s OpenAI investment, while growth excluding that contribution was lower. Investors should separate recurring operating profit from investment-related effects before extrapolating the headline rate.

Second-order risk sits in AI economics. Strong demand can support Azure and related software sales, but the investment cycle may also lift depreciation and infrastructure costs before customer usage converts into durable free cash flow. AWS and Google Cloud are relevant competitive checks: if customers have credible alternatives, AI demand need not translate into pricing power for Microsoft. Over the next 1–3 months, Azure growth, capital spending, and management commentary on capacity and monetization matter more than the lagging streak. Over 6–18 months, the test is whether AI revenue growth converts to incremental margins and cash generation. The contrarian point is that rising earnings can make the stock look cheaper without making it cheap; persistent growth may already be required to defend the current multiple.

Key Decisions for Investors

• Do not buy MSFT solely on the historical pattern of rebounds after prior underperformance. Treat the streak as a sentiment signal, not a catalyst.
• Watch rather than add aggressively ahead of the next results: verify Azure growth, capital-spending trajectory, cloud margins, and free-cash-flow conversion, and reconcile reported EPS with earnings excluding the OpenAI-related contribution.
• If those measures confirm durable monetization, consider a modest benchmark-relative long in MSFT versus SPY; size for multiple-compression risk rather than assuming rerating. If cloud growth decelerates while infrastructure spending rises, avoid the pair or reduce exposure.
• Falsify the constructive thesis if operating growth or guidance weakens while capex remains elevated, or if adjusted earnings growth falls materially below the recent pace. A reversal in those metrics would make valuation—not the performance streak—the stronger reason to de-risk.