We recently compiled a list of the 8 Best US Stocks For Foreign Investors Right Now. In this article, we are going to take a look at where Microsoft Corp. (NASDAQ:MSFT) stands against the other US stocks.
Optimism Amid Market Strength
Despite previous recession predictions, the market has shown resilience and continued to rise, largely due to multiple expansions rather than just earnings growth. Current market valuations are trading at approximately 22 times earnings during an easing cycle, raising questions about future earnings growth. There seems to be a disconnect between expectations for significant easing and projected strong earnings growth.
Investors are encouraged to remain vigilant and consider the evolving economic landscape as they navigate potential market shifts. Earlier in October, Jason Trennert, Strategas Research Partners chairman and CEO, joined CNBC to discuss the latest market trends and the state of the economy, highlighting that the bar is high to get bearish now. We covered his opinion in our article about the 8 High Growth High Margin Stocks to Invest In Now in much more detail. Here’s an excerpt from that discussion:
“Despite the challenges of 2022 and early 2023, which made it difficult to envision a market recovery, he noted that the market has defied expectations and continued to rise. Trennert attributed a significant portion of this upward movement to multiple expansions rather than just earnings growth. He marked a pivotal moment in 2023 as the failure of Silicon Valley Bank, which led to increased liquidity in the market and a subsequent rally. He recalled that around eleven months ago, the S&P 500 briefly hit 4,100 when ten-year yields reached 5%, suggesting that market dynamics have shifted considerably since then.
….He expressed skepticism about future earnings growth, as expectations for a 14% increase in S&P earnings next year seem inconsistent with the anticipated six rate cuts from the Fed. He emphasized that if the market is expecting such significant easing while also projecting strong earnings growth, there may be a disconnect.
…Despite these concerns, Trennert acknowledged that it is challenging to adopt a bearish outlook given current market conditions. He noted that ten-year treasury yields above 4.5% typically lead to market indigestion, while yields below this threshold make it hard to remain pessimistic.”
On October 16, J.J. Kinahan, IG North America CEO, joined CNBC’s ‘Squawk Box’ to discuss the latest market trends, highlighting that he has never seen investors this afraid of a market that’s doing so well. J.J. Kinahan noted that the upcoming weeks would be particularly interesting due to the convergence of earnings reports and the impending election, alongside uncertainty surrounding the Fed’s next moves. He remarked on the market’s resilience, highlighting that there have been 46 new highs for the S&P 500 this year, despite a general sentiment of skepticism among investors. He expressed that it is unusual for a market to perform so well while simultaneously being viewed with caution and fear.
Kinahan pointed out that many investors are hesitant, particularly those in their mid-30s and younger, who have not experienced a significant downturn in the market. He explained that this demographic often perceives any market decline as temporary, lasting only a few days. He emphasized the importance of taking risks when young and noted that many younger investors are excited about their opportunities in the current market environment. This positive sentiment is particularly significant given their parents’ experiences during the financial crisis of 2008-2009.
He also speculated that part of the reason for the market’s strong performance might be attributed to older investors who have been burned in previous downturns and are now waiting for a pullback that has yet to materialize. Kinahan suggested that as these investors gradually capitulate, they may start to invest more actively in the market.
Discussing interest rates, Kinahan acknowledged that while the Fed is in a massive easing cycle, there seems to be a disconnect with the bond market recently. He mentioned a study indicating that volatility during election years is not significantly greater than in non-election years. Currently, volatility is relatively low, hovering around a historical average of 20, and only recently rising to this level. He explained that typically, volatility tends to increase after elections, when political changes begin to take effect and policies, are implemented. He anticipated that January would bring more clarity regarding how these changes might impact the markets.
Kinahan’s insights reflect a complex interplay between investor sentiment, market performance, and external economic factors as they navigate through earnings season and an election year. His perspective underscores a cautious optimism about the market’s ability to maintain its upward trajectory despite prevailing uncertainties.
Methodology
To find the best US stocks for foreign investors, we used Insider Monkey’s proprietary database to find US stocks that were the most popular among elite and that analysts were bullish on. We then selected the top 8 stocks with the highest average analysts’ upside potential. The stocks are ranked in ascending order of their average analysts’ upside potential, as of October 16.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A development team working together to create the next version of Windows.
Microsoft Corp. (NASDAQ:MSFT)
Average Upside Potential: 18.21%
Number of Hedge Fund Holders: 279
Microsoft Corp. (NASDAQ:MSFT) is a multinational technology company that develops, licenses, and supports computer software, consumer electronics, and personal computers. Founded in 1975, it became the world’s largest software maker by revenue in the mid-1990s through the success of its Windows operating system. Today, it offers a range of products and services, including the Windows operating system, Office productivity suite, Azure cloud computing platform, Xbox gaming consoles, and Surface devices.
The company’s FQ4 2024 was a success, with revenue reaching $64.73 billion, up 15.20% year-over-year, earning $2.95 per share. Microsoft Cloud led the way, generating $36.8 billion, up 21%, with record bookings. Office commercial sales hit $48 billion, while individual Office sales reached $6.2 billion, up 4%. Dynamics ERP and CRM software sales grew 19% to $6.3 billion. Bing also saw a 3% increase as more users switched from Google Search.
Its Azure OpenAI service has seen a 60% surge in customers, reaching 60,000 in the past quarter. Azure revenue surged by 30%. Partnerships with Lumen Technologies and Palantir strengthen its AI leadership and cloud capabilities. These strategic moves make Microsoft Corp. (NASDAQ:MSFT) a promising investment for investors seeking growth and returns.
The company’s growth extends beyond cloud services. Its Copilot software, an AI-powered productivity assistant, is gaining traction. Microsoft 365 Copilot customer numbers grew over 60% sequentially in FQ4. With an Office 365 user base exceeding 400 million, its future of productivity tools looks promising.
Generation Investment Management Global Equity Strategy stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“Generative AI’s hunger for power has increased disproportionately with its intelligence. According to one estimate, OpenAI’s GPT-4 required 50 gigawatt hours (GWh) of electricity to train, much more than the 1.3 GWh needed for GPT-3.3 And then AI requires even more power when it is put to use (so called ‘inference’). Some of the latest trends worry us. Microsoft Corporation (NASDAQ:MSFT) appears to be slipping in its ESG goals, with its greenhouse gas emissions rising again last year, as it invests in becoming a big player in AI. It is struggling in particular to curb its Scope 3 emissions in the capital goods category – nowhere more so than in the activity associated with the construction of data centres: both the embedded carbon in construction materials like steel and cement, as well as the emissions from the manufacturing of hardware components such as semiconductors, servers and racks. Google’s emissions have risen by close to 50% in the past five years.
We feel it is worth dwelling on Microsoft for a few moments, since we suspect you will be hearing a lot more about the relationship between AI and sustainability in the coming months. The bottom line is that we continue to see Microsoft as a sustainability leader. In the case of Scope 2 emissions, the company covers 100% of its electricity use with purchases of renewable energy. Crucially, though, the majority of this green energy is directly sourced via power purchase agreements, which bring new renewable capacity to the grid. Microsoft is also committed to operating 24/7 on renewable power by 2030, a policy that will help bring energy storage onto the grid as well…” (Click here to read the full text)
Overall MSFT ranks 7th on our list of the best US stocks for foreign investors right now. While we acknowledge the growth potential of MSFT, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.