Microsoft (NASDAQ:MSFT) reported the result for its fiscal second quarter, with its cloud business seeing a 29% year-over-year revenue increase, slightly down from 31% growth in the previous quarter. Moreover, Q2 revenue slightly missed consensus estimates.
The tech behemoth expects accelerated cloud growth in the first half of next year. Initially, the stock dropped by up to 7% in extended trading but recovered to a 2.6% decline.
According to UBS strategists, Microsoft’s report could set the stage for market sentiment as investors await earnings reports from other big-tech firms like Meta (NASDAQ:META), Apple (NASDAQ:AAPL), and Amazon (NASDAQ:AMZN).
Furthermore, the upcoming Federal Reserve statement, potentially signaling the first rate cut since the pandemic, is highly anticipated by investors.
“With the earnings season in full swing, we believe profits for S&P 500 companies remain on track to grow 10–12% for the second quarter,” strategists said in a note.
“The combination of resilient US economic growth, falling inflation, likely Fed rate cuts, and solid AI spending should push up the benchmark to 5,900 by the end of the year, in our view."
Although more data is incoming, UBS maintains a positive outlook on the technology sector due to strong AI capital expenditure and demand.
Microsoft’s guidance indicates steady monetization amid solid growth, UBS noted. Similarly, AMD (NASDAQ:AMD) has raised its 2024 AI chip sales guidance based on robust demand and tight supply forecasts through 2025. Supply-chain checks also point to strong demand for AI accelerators, including GPUs and custom chips.
Following the recent tech correction, strategists see tactical opportunities in companies with strong earnings growth visibility, expecting the tech sector to achieve 20–25% earnings growth. They particularly favor AI beneficiaries in the semiconductor, software, and internet sectors.
Regarding the recent rotation out of large caps, strategists believe that the technical factors supporting this trend are “likely to dissipate soon” as investors shift back their focus to fundamentals.
“Without taking a single-name view, we continue to see a favorable backdrop for US equities, and advise investors to maintain a full allocation to the US market,” they said.