Under the Spotlight
Microsoft (MSFT)
We purchased Microsoft after the release of its quarterly results. The decision comes as investors examine more closely whether companies can translate their artificial intelligence investments into revenue, earnings and cash.
For its first quarter of fiscal 2027, ended September 30, Microsoft reported:
- Revenue: US$92.3 billion, up 19%.
- Operating income: US$45.9 billion, up 21%.
- Adjusted earnings per share: US$4.89, up 18%, excluding the effects of investments in OpenAI.
- Microsoft Cloud revenue: US$63.9 billion, up 30%.
- Azure revenue growth: 48%, compared with 42% in the previous quarter.
- Microsoft 365 commercial cloud revenue growth: 17%.
- Free cash flow: US$18.6 billion, after cash spending on property and equipment.
Why buy after earnings?
The first argument is Azure’s acceleration. Growth of 48% confirms sustained demand for cloud services. Management also expects growth of 49% to 50% next quarter in constant currency, above the 47.6% estimate reported by Reuters. The outlook therefore extends the trend seen in the results.
The second argument is profitability. Operating income increased faster than revenue, and the operating margin reached approximately 50%. Microsoft is demonstrating that its expansion is translating into earnings, even during a period of substantial investment.
The third argument is cash generation. Free cash flow of US$18.6 billion substantially exceeded the US$8.54 billion estimate reported by Reuters. This capacity gives Microsoft flexibility to finance development from its operations while retaining the option of external financing.
Buying after the release allows these factors to be assessed using reported results and updated guidance. It reduces uncertainty surrounding the earnings announcement without eliminating market risk. At approximately 27 times trailing twelve-month earnings on Friday morning, the valuation nevertheless requires growth to continue.
Important risks remain. Capital expenditures reached US$45.2 billion, partly constrained by delayed capacity deliveries. Management expects spending to exceed US$50 billion next quarter. Free cash flow also declined from a year earlier. Its development will therefore warrant attention as investment accelerates.
Microsoft’s appeal lies in this combination of confirmed growth, profitability and cash generation. Sector weakness may continue to influence its share price in the short term. Our investment approach, combining quantitative, fundamental and technical analysis, helps assess the company within that broader context.
Theme of the Week
Interest rates and earnings create a more selective market
The week connected two issues: financing costs remain elevated, and companies must demonstrate that their investments are producing results. Revenue growth remains important, but margins and cash generation are taking a more prominent role in investors’ assessments.
Bank of Canada: a rate increase despite uneven growth
On Wednesday, the Bank of Canada raised its policy rate by 25 basis points to 2.50%. It aims to reduce the risk that persistently high energy prices spread to other goods and services.
The Bank expects inflation to remain around 3% through much of 2027 before returning close to 2% by mid-2028. Higher fuel, transportation and input costs could increasingly be passed on to consumers. It indicated that further increases might be necessary while emphasizing a cautious approach.
Friday’s data nevertheless highlighted the fragility of Canadian activity. GDP was essentially unchanged in August for a second consecutive month. The preliminary estimate points to a 0.1% decline in September. The Bank must therefore balance price pressures against uneven growth, a combination that sustains uncertainty about borrowing costs.
Federal Reserve: a pause that keeps the debate open
The Federal Reserve maintained its policy rate range at 3.75% to 4%. Two members nevertheless preferred a 25-basis-point increase. Holding rates steady therefore does not mean inflation concerns have disappeared.
U.S. data illustrate that tension. GDP expanded at an annualized rate of 3.4% in the third quarter, following 2.2% in the second. September PCE inflation reached 3.6% year over year and 3.1% excluding food and energy. Compensation costs increased 0.8% in the third quarter, slightly below the previous quarter’s 0.9%.
The economy continues to support corporate prospects, but inflation limits the Fed’s flexibility. Internationally, the European Central Bank and the Bank of Japan also left interest rates unchanged this week.
Technology: growth alone is no longer enough
Alphabet reported revenue growth of 25% to US$127.6 billion, while Google Cloud revenue more than doubled. Despite that expansion, investment exceeded cash generated by operations, resulting in negative quarterly free cash flow of US$9.1 billion. The shares fell more than 12% on Thursday.
At Amazon, AWS revenue increased approximately 39% to US$46 billion. The group nevertheless reported negative free cash flow of US$42.4 billion over twelve months and maintained its investment plan of approximately US$220 billion for 2026. The measurement period differs from Microsoft’s and Alphabet’s, but financing expansion remains a common issue.
Intel provided another reminder that strong past results do not necessarily protect a stock. Quarterly revenue increased 21% to US$16.5 billion, but its forecast of US$15 billion to US$16 billion for the following quarter disappointed investors. Weakness in the personal-computer market adds another concern for the sector.
Infrastructure projects nevertheless continue, as illustrated by Tuesday’s developments in the AMD and Meta partnership. In our assessment, investors increasingly want to distinguish between technology demand, the investment required to meet it and the cash that can ultimately be generated.
Rotation extends beyond technology
On Thursday, a majority of S&P 500 constituents advanced even as the index declined. Large technology companies remained under pressure Friday morning, while several businesses in other sectors held up better. The weight of large companies therefore magnifies losses in traditional indexes.
Results outside technology provide useful reference points:
- Mastercard increased revenue by 14%.
- PACCAR, featured in our previous edition, reported revenue growth of 19% and net income growth of 44%.
- Caterpillar increased revenue by 17% but nevertheless fell short of market expectations.
- Eli Lilly raised its annual outlook after reporting 39% revenue growth, driven primarily by Mounjaro and Zepbound.
- ExxonMobil and Chevron benefited from strong refining operations.
Oil also remains a source of volatility as markets respond to Middle East tensions and prospects for negotiations. Elevated energy prices can support some producers while increasing costs for other businesses.
The week therefore highlights the importance of examining growth drivers, expectations already reflected in share prices and each company’s ability to preserve margins.
Market Summary
After advancing earlier in the week, U.S. markets lost momentum on Thursday and Friday. Following Friday’s opening, the S&P 500 was down approximately 1.2%, the Nasdaq more than 2%, and the Dow Jones more modestly. The S&P/TSX also declined.
Those moves brought the S&P 500 and TSX close to unchanged for the week, while the Nasdaq and Dow were negative. Intel posted one of the sharpest declines, while Eli Lilly extended its advance. U.S. Treasury yields were also below the previous Friday’s levels.
Markets by the Numbers
Weekly changes as of October 30, 2026
Changes from the previous Friday’s close to Friday morning’s intraday readings.
| Market or indicator | Weekly change |
|---|---|
| S&P 500 | +0.01% |
| Nasdaq Composite | −1.36% |
| Dow Jones | −0.11% |
| S&P/TSX | +0.08% |
| Brent crude | +0.72% |
| WTI crude | +0.58% |
| U.S. 10-year Treasury yield | −5.0 bps |
| CAD/USD | +0.25% |
Stocks in Brief
Friday’s session changes, recorded after the opening.
Microsoft (MSFT): −1.53%
The stock declined alongside large technology companies. Azure’s acceleration and positive free cash flow remain distinguishing features of its results.
Alphabet (GOOGL): −1.44%
The shares extended their decline following Thursday’s sharp sell-off. Cloud growth is accompanied by substantial investment and negative quarterly free cash flow.
Amazon (AMZN): −2.99%
Strong AWS growth coexists with significant investment requirements and negative free cash flow over twelve months.
Intel (INTC): −28.72%
The next-quarter outlook disappointed investors despite quarterly revenue growth. Weakness in the personal-computer market remains an important issue.
Eli Lilly (LLY): +4.07%
The shares extended their earnings-related advance. Management now expects annual revenue of US$91 billion to US$92 billion.
What to Watch Next Week
Elections, technology earnings, the budget and employment
The U.S. midterm elections on Tuesday, November 3 could influence expectations surrounding taxes, trade and regulation. Earnings from Apple on Monday, AMD on Tuesday and Qualcomm on Wednesday will provide further insight into technology demand.
In Canada, the federal budget will be tabled Thursday, November 5. Employment reports in Canada and the United States on Friday, November 6 will help assess economic strength and the interest rate outlook. Oil and developments in the Middle East will also remain in focus.
To discuss your portfolio and objectives in this environment, contact our team.
