The Market's Biggest Test of the Year Begins Tonight

There are moments when the markets are put to the test.

When victory or defeat is on the line.

This week is one of them.

Tomorrow, we have a rate decision from the Federal Reserve. This is a market mover. Expectations are for a September cut, or at the very least some inkling that a cut is coming soon.

At the same time, over the next three days, we’ll hear earnings from $10 trillion worth of companies, representing a large chunk of the “Magnificent 7.”

Where they go, so go the markets.

And tonight, the first of these is on deck. So, here’s what to expect…

AI’s Top Dog

Last year, I wrote that Microsoft (MSFT) would be the next $3-trillion company.

It crossed that mark on January 25, 2024.

I also called it my No. 1 stock for artificial intelligence (AI).  

Microsoft began investing in OpenAI all the way back in 2019… but no one wasted much print on it then. Not until OpenAI released ChatGPT in November 2022.

Microsoft’s stake in the AI start-up is now $13 billion. And this 49% stake could potentially be worth $100 billion. Over the past year, Microsoft has added AI to all its products in its Office 365 suite, including Copilot.

And as I’ve previously outlined, the most important piece of this AI upside is Azure. This is an opportunity that could be worth $90 billion according to Morgan Stanley (MS).

Finally, I tout that if investors want to know where the markets are heading next, they need to keep an eye on Microsoft.

The reason for this is simple...

You see, tech mega-cap accounts for 6.88% of the Dow Jones Industrial Average… 6.89% of the S&P 500… And 8.49% of the Nasdaq 100.

It’s one of, if not the largest component of every index.

Now, year-to-date, Microsoft shares are up 14.3%.

That’s smack dab in line with the performance of the Invesco QQQ ETF (QQQ) – a proxy for the Nasdaq 100. Though, that move higher in 2024 is slightly below the return of the broader Nasdaq and the S&P 500.

But it’s worth noting that Microsoft shares have blown past the $410 price target Oppenheimer & Co set last year, as well as the $415 price target Morgan Stanley had pinned to shares.

Well, tonight the tech giant will report fourth quarter results for fiscal year 2024. And if the market goes where Microsoft goes, we better know what to expect…

Fourth Quarter Flop

Shares of Microsoft are down roughly 5% this July.

And is one of the reasons the QQQ will likely finish the month will a loss for the first time since 2007!

It also currently marks the worst performance from Microsoft shares in July since 2013.

Now, current expectations are for the company to report a 14.6% increase in revenue to $64.37 billion with earnings of $2.93 per share, a 9.3% rise from a year ago.

Often, a lot of the focus is going to be on net profit margins. There’s ongoing buildout here in the AI infrastructure space. And Goldman Sachs (GS) expects cloud revenue to be $37.2 billion.

Those are all solid figures.

But, when we look at my VertEA trend, the outlook for Microsoft shares isn’t great…

Over the last 12 years, shares have fallen on this report 7 times. That’s translates to only a 41.6% success rate. And our average one-day move for Microsoft shares on this earnings release is a loss of 0.97%.

That makes it the company’s worst received earnings report of the year.

Why?

Well, Microsoft – like a lot of companies – has a “sawtooth” pattern in terms of revenue. That means it's uneven… but uneven in the same pattern. Its fiscal year fourth quarter is one of its strongest in terms of sales. But worst in terms of share price reaction because we so often see forward guidance for the first quarter being lower.

Investors don’t often respond well to this.

Conversely, the company’s third quarter is its best received. Shares have only fallen on that report twice in the last 13 years. That’s due to fourth quarter revenue traditionally being so strong.

Now, at the moment, expectations are for Microsoft to provide fiscal year first quarter 2025 revenue guidance of $65.27 billion. And the outlook for the second quarter is $70.02 billion in sales.

If the company guides above those numbers, we could definitely see a rally.

But keep in mind, VertEA isn’t built on randomness. There is a method to the madness, underpinned by fundamentals.

Microsoft shares have put together an okay 2024. It hasn’t been great. But they’re still in positive territory. They’ve taken a step back in July. And don’t be surprised if they take another small step back on fourth quarter earnings tonight and tomorrow. That’s been the trend for going on a dozen years.

Siding with probabilities, not panic,

Matthew