Microsoft's 3% surge lifts S&P 500 but technical patterns warn of reversal

Microsoft Corp.'s better-than-expected quarterly results drove a morning rally that technical analysts flagged as a potential selling opportunity.

The S&P 500 gained in morning trading after Microsoft posted earnings of $4.74 a share that topped estimates, though weakening technical patterns across the QQQ and Dow suggested the bounce may prove short-lived.

"Azure and Copilot are set to inflect, but the market is yet to fully price in the timing and magnitude of that inflection," Morgan Stanley analysts wrote in a note last week.

Microsoft's fiscal fourth-quarter revenue rose 18 percent to $90.01 billion, exceeding the $87.62 billion consensus. Azure and other cloud services revenue surged 43 percent, accelerating from the 40 percent growth analysts had expected. The intelligent cloud segment generated $39.31 billion in revenue, up 32 percent. Microsoft shares climbed 3.2 percent in after-hours trading, though the stock had fallen 19 percent this year through Wednesday's close.

The rally extended to the broader market, with the S&P 500 and the tech-heavy QQQ both opening higher. But traders pointed to deteriorating technical indicators on the Dow Jones Industrial Average and the Nasdaq-100 as evidence that the advance lacked conviction. The QQQ, which tracks the Nasdaq-100, has been forming lower highs since early July, a pattern that typically precedes further downside. The Dow has also struggled to hold above its 50-day moving average, a key level that has acted as resistance in recent sessions.

The move higher coincided with fresh economic data showing GDP growth slowed while the Federal Reserve's preferred inflation gauge, the PCE price index, matched estimates. The combination of decelerating growth and steady inflation complicates the Fed's policy path. The 10-year Treasury yield moved lower on the data, providing some support for equities, but the relief was tempered by the technical concerns.

The technology sector led the advance, with Microsoft's results providing a tailwind for megacap growth names. Alphabet, which reported its own earnings this week, saw its shares move in sympathy after the company disclosed second-quarter capital expenditures of $44.92 billion, double the year-ago period, and raised its full-year 2026 capex outlook to between $195 billion and $205 billion. Microsoft Chief Executive Satya Nadella said Azure revenue surpassed $100 billion for the first time, and Microsoft 365 Copilot reached over 30 million paid seats, "reflecting the confidence customers are placing in us to power their AI transformation."

The question for investors is whether the Microsoft-driven bounce can sustain itself or whether it represents a rally that will fade. With the S&P 500 down 19 percent year to date through Wednesday and the QQQ showing signs of distribution, the next catalyst may be the Fed's policy decision. Oil prices holding near $90 a barrel as Middle East tensions escalate add another layer of uncertainty for equity positioning. The 10-year Treasury yield's direction will also be critical for growth stocks, which are sensitive to shifts in discount rates. For now, the weight of technical evidence suggests caution, even as Microsoft's results remind investors of the underlying strength in AI-driven demand.

This article is for informational purposes only and does not constitute investment advice.