Microsoft shares plummeted more than 10% on Thursday, marking the company's worst trading day since 2013, as investors punished the tech giant for record spending on artificial intelligence infrastructure despite reporting stronger-than-expected quarterly results. The sharp decline rippled across Wall Street, dragging the S&P 500 down 1% and overshadowing positive earnings from other major technology companies.
The stock's fall erased roughly $358 billion in market value in a single trading session, one of the largest single-day losses on record. Only Nvidia has shed more market value in one day, according to market data.
Background
Microsoft reported second-quarter earnings that beat analyst expectations on both top and bottom lines. The company posted revenue of $81.27 billion, compared to analyst estimates of $80.28 billion, and earned $4.14 per share against expectations of $3.86. Microsoft Cloud revenue crossed the $50 billion mark for the first time, reaching $51.5 billion, up from $40.9 billion a year earlier.
The cloud division's success was driven by demand for Azure computing services and workloads tied to OpenAI, which Microsoft has invested heavily in backing. The company also reported a backlog of remaining performance obligations that surged to $625 billion, offering rare visibility into long-term customer commitments and future revenue.
Key Details
Despite the earnings beat, investors focused their attention on two concerning developments: record capital expenditures and a slowdown in Azure growth.
Microsoft disclosed quarterly capital spending of more than $37.5 billion, a significant increase that reflects the company's aggressive push to build out data centers and AI computing infrastructure. This spending level far exceeded what investors had anticipated and raised questions about when these massive investments would translate into higher profits and faster revenue growth.
"One of the core issues that is weighing on investors is capex is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected," said Keith Weiss, head of U.S. software research at Morgan Stanley.
Azure growth, the crown jewel of Microsoft's cloud business, showed signs of deceleration. The service grew 39% in the second quarter, down from 40% in the first quarter. While still strong by most standards, the slight slowdown disappointed investors who expected acceleration given the company's heavy spending on capacity expansion.
Microsoft executives acknowledged that the company faces ongoing AI capacity constraints, meaning customer demand exceeds the available computing resources. During the earnings call, Chief Financial Officer Amy Hood said the company would continue to face these constraints "at least" through the end of the fiscal year in June.
The Investor Concern
The combination of soaring capital expenditures and slowing revenue growth raised a fundamental question for investors: whether Microsoft can build computing capacity fast enough to meet demand, and whether the return on investment from these massive spending plans will justify the costs.
Analysts and investors expressed concern that Microsoft might be spending heavily on infrastructure without being able to convert that spending into proportional revenue and profit gains in the near term. This gap between investment and returns is what prompted the sharp market reaction.
JPMorgan Chase reduced its price target for Microsoft from $575 to $550 per share but maintained an "overweight" rating, suggesting the firm still sees value in the stock at lower prices. Other major banks also adjusted their outlooks. UBS lowered its target from $650 to $600, while Bank of America cut its price objective from $640 to $520.
What This Means
Thursday's selloff highlighted a broader tension in the technology sector heading into 2026. While investors remain enthusiastic about artificial intelligence and its potential to drive future growth, they are increasingly skeptical about the costs required to build the infrastructure needed to deliver on that promise.
Microsoft's experience suggests that strong earnings and impressive cloud revenue growth may no longer be enough to support the elevated valuations that mega-cap technology companies currently command. Investors now appear to demand clearer evidence that massive capital spending will translate into faster revenue growth and margin expansion in the near term.
The market's reaction also reflects concern about capacity constraints in the AI infrastructure market. If Microsoft cannot build data centers and computing power fast enough to meet customer demand, competitors could gain ground, and Microsoft might lose market share in the lucrative AI services market.
The selloff weighed heavily on the overall market, with the Nasdaq also declining as investors reassessed the costs and benefits of the artificial intelligence boom that has driven much of the market's gains over the past year. The decline suggested that investors are entering a new phase of scrutiny for technology companies, one where the focus shifts from growth potential to actual return on investment.
