Microsoft experiences its worst performance since the 2008 financial crisis. Have the U.S. stocks established a historic top?

Ask AI · How Will Microsoft’s AI Transformation Affect Its Stock Price Trend?

The geopolitical situation in the Middle East continues to fluctuate, and the gold market, oil market, and stock market have all shown sharply volatile trends. As the strong U.S. dollar returns again, both gold and equities have seen steep declines. As of now, the international gold price has already fallen into a bear market, and the U.S. stock market is also accelerating lower.

The movement of the “seven giants” of the U.S. stock market has had a deep, binding effect on major U.S. market indexes. During the past bull run in U.S. stocks, the seven giants played an indispensable role. However, during this round of correction, the seven giants’ performance has also begun to show clear signs of differentiation. Tech giants such as Microsoft, Meta, and Amazon have also experienced declines to varying degrees.

Among the seven giants of U.S. stocks, Microsoft has suffered the most pronounced drop. According to the latest data, Microsoft’s stock price has already posted its worst performance since the 2008 financial crisis, while also recording the largest quarterly decline since the fourth quarter of 2008. Since the high point last year, Microsoft’s cumulative decline has exceeded 33%.

Looking at year-over-year gains and losses, since 2008 only 2008 and 2022 have seen declines larger than this year. In 2008, Microsoft’s annual decline was about 44%; in 2022, it was about 28%. From the beginning of this year, Microsoft’s annual decline has reached 24.3%, approaching the level of 2022’s annual decline.

Behind Microsoft’s steep stock drop is related to market concerns about expectations that the AI era may replace the software industry. Although it is currently only the market’s speculation, with AI developing at high speed, things in the future may happen at any time. If Microsoft in the AI era remains unwilling to proactively seek change, then its moat will be continuously eroded.

From a fundamental perspective, Microsoft is not merely a software company, but a “three-in-one” company of AI infrastructure + platforms + applications. From a certain angle, AI is not about replacing Microsoft’s business; rather, it is more about business enablement—providing users with a more personalized service experience.

Under the impact of the continued weakness in the seven giants’ performance, the U.S. stock market has shown a sharp decline. Among them, the Nasdaq Composite has fallen more than 10% from its recent high, while the cumulative maximum declines of the Dow Jones and the S&P 500 are also approaching 10%.

In fact, because market weights are overly tilted toward a small number of giant companies, it is inevitable that there will be some risk of distortion for U.S. market indexes. To some extent, the U.S. market indexes have a higher dependence on a small number of giant companies, and the degree of distortion in market indexes may be far greater than that in the A-share and Hong Kong stock markets.

Has the U.S. stock market already established an all-time historical top? The best way to judge whether the stock market has already formed an all-time historical top is to see whether the market index has fallen into a technical bear market.

According to the definition of a technical bear market, when a market index falls more than 20% from its one-year high, it is considered established as a technical bear market. Based on the highs of the Dow Jones and Nasdaq indexes, the cumulative decline is currently only around 10%, still far from reaching the 20% cumulative decline level. In other words, when the U.S. stock market fully falls into a technical bear market, it will be an important time point for the U.S. stock market to confirm an all-time historical top.

This round of declines in the U.S. stock market is highly related to factors such as the return of a strong U.S. dollar and the repeated turbulence in the Middle East. However, this round of correction is also closely tied to the U.S. stock market’s own “de-rating” and “deflating the bubble.”

After experiencing a round of bull market, the valuation level in the U.S. stock market has already reached historical highs. The market is willing to award higher valuation premiums, mainly thanks to the sustained high growth of the top U.S. companies’ performance.

However, under the impact of the new round of AI infrastructure construction and massive capital expenditures, the space for continuous growth in listed companies’ performance has been more or less weakened. Judging from the capital expenditure plans of the seven giants in U.S. stocks, it is expected that in the coming years there will be sustained high growth in capital expenditures. Whether listed companies’ earnings growth rates can maintain a strong growth trend remains an unknown.

When listed companies’ earnings growth rates peak, and future capital expenditure intensity still has not been substantially reduced, then the valuation and pricing level of listed companies will be significantly affected, making it difficult for companies to continue enjoying the high valuation premium space.

If the seven giants in U.S. stocks continue to fall, and the U.S. market index steps down to the next level, it cannot be ruled out that a series of measures to stabilize the market will be rolled out in the future. If U.S. blue-chip companies announce to increase stock buybacks or cash dividends, or to temporarily reduce the scale of capital expenditures, such measures would be beneficial for the U.S. stock market to reach a bottom earlier. Otherwise, this round of correction could last for a relatively long time.

Author’s statement: Personal views, for reference only