Microsoft Stock Stuck in Correction Mode, Bank of America Bets Big Before Earnings

Since 2026, Microsoft (MSFT-US) stock has shown relatively weak performance, with its market capitalization shrinking by approximately one-fifth, making it one of the worst-performing large tech stocks this year. Although Azure cloud services and AI businesses continue to expand, investors are frustrated that massive capital expenditures have not yet translated into stock price appreciation.

However, just ahead of Microsoft’s earnings release on July 29, Bank of America has chosen to double down, signaling strong confidence.

Bank of America analyst Tal Liani, in his latest preview report, maintains a 'Buy' rating on Microsoft and sets a price target of $500.

Liani points out that Microsoft is currently trading at around 19 times its expected earnings for fiscal year 2027, significantly below its five-year average of 29 times. He believes the current valuation gap reflects market anxiety over short-term capital spending rather than any deterioration in the company’s fundamentals. About 95% of analysts currently maintain a 'Buy' rating on Microsoft, indicating that institutional professionals still have strong confidence in its long-term prospects.

The key metric investors are watching is Azure revenue growth. Microsoft previously forecast growth in the mid-to-high range of 30% to 40%, and Bank of America predicts it will reach 39–40%. Liani argues that Azure’s growth rate must sustain at this level; otherwise, market concerns over the return on investment (ROI) for AI spending will deepen.

Microsoft’s main challenge today is not weak demand, but supply constraints. As data centers in Wisconsin and other locations come online, long-pending orders are expected to accelerate conversion into actual revenue.

Microsoft’s infrastructure investment for fiscal year 2026 is expected to reach $190 billion, primarily allocated to hardware and data centers required for AI computing power. While this massive spending will cause a sharp decline in free cash flow in the short term, Bank of America views it as a necessary strategy to convert short-term capital into long-term capacity.

Additionally, enterprise adoption of the Copilot AI assistant is another critical indicator. Last quarter, paid Copilot seats surpassed 20 million. If this growth continues this quarter, it will demonstrate that AI is transitioning from the infrastructure-building phase to one of tangible revenue contribution.

As the first of the mega cloud providers to report earnings, Bank of America believes that if Azure maintains its growth momentum and management provides clear guidance on future spending, Microsoft’s stock could rebound from its lows. Otherwise, bearish sentiment toward large software stocks may spread further.