Microsoft experienced its worst quarter on Wall Street since the 2008 financial crisis, with its stock plunging 23% in the first three months of 2026. This decline was notably steeper than any of its tech peers and the Nasdaq, which fell 7% during the same period [1]. The selloff was driven by investor concerns regarding the company's return on investment in artificial intelligence, particularly the adoption and traction of its Copilot AI assistant. Microsoft's earnings multiple has dropped to its lowest level since the fourth quarter of 2022, coinciding with the introduction of ChatGPT by OpenAI [1].
Despite a brief rebound, with shares rising 3.3% on Tuesday—the largest jump since July—Microsoft faces significant challenges. The company must balance efficient growth in AI with the expansion of its cloud AI infrastructure to meet rising demand. Additionally, surging oil prices due to the war in Iran threaten to increase data center costs [1]. Analyst Ben Reitzes of Melius Research noted that Microsoft is compelled to use valuable Azure cloud capacity to improve Copilot, as maintaining momentum in its most profitable segment is critical [1].
The broader software sector is also under pressure, with stocks like Adobe, Atlassian, and ServiceNow falling more than 30% this year. Jason Lemkin, founder of SaaStr, described this trend as an AI-inspired 'SaaSpocalypse,' suggesting that much of traditional SaaS is in terminal decline. He highlighted that software earnings multiples now trail those of the S&P 500 [1].
However, not all analysts agree with the negative sentiment. Gil Luria of DA Davidson argued that the selloff is unjustified and recommends buying Microsoft shares. He pointed out that Microsoft reported revenue growth of almost 17% in the latest quarter, an acceleration from the previous year. Luria expects Microsoft's earnings growth to outpace the broader market in 2026, emphasizing the enduring strength of products like Windows and Office [1].
CONCLUSION
Microsoft's stock suffered a historic quarterly decline amid concerns about its AI strategy and product adoption, but some analysts see the selloff as disconnected from the company's strong fundamentals and accelerating revenue growth. The market remains highly volatile, with broader software sector weakness and rising operational costs adding to uncertainty. Despite these challenges, Microsoft is expected by some to outperform the broader market in earnings growth this year.