As the third quarter came to a close, Microsoft (NASDAQ: MSFT) delivered its best quarterly stock performance since 1998. From July through September, Microsoft shares rose 37.5%, adding $1 trillion in market value. Against the backdrop of the tech-heavy Nasdaq 100 Index gaining just 0.4% over the same period, Microsoft emerged as the fifth-best performer in that index. Wall Street is betting that the stock can continue to climb as Microsoft's position in artificial intelligence keeps strengthening.

Chad Morganlander, a senior portfolio manager at Washington Crossing Advisors and a long-time Microsoft shareholder, said that after a period of less-than-clear messaging, the company has become more clear and concise about how it will monetize capital expenditures and deliver benefits to customers. Much of Microsoft's rally stemmed from its earnings report released at the end of July. The results showed that its cloud business posted its fastest growth in four years, driven by strong AI demand. The day after the report, Microsoft shares jumped 16% — their best single-day performance since October 2008 — adding $450 billion in market value. The earnings release eased market concerns about whether Microsoft's massive AI investments could generate better growth.

Compared with other companies making similarly large AI bets, such as Alphabet, Amazon and Meta, Microsoft's financial performance has been more encouraging — among the four, Microsoft is the only one whose annual free cash flow has not yet turned negative. Morganlander said: "Microsoft has demonstrated a clear path to AI profitability. As a company that continues to invest but has not fallen into losses, it looks like the most mature one in the room."

The strength of Microsoft's stock rebound is especially striking because market sentiment reversed so quickly. June was Microsoft's worst month since 2000, when investors questioned the company's spending and the overall prospects of software companies in an AI world. But industry concerns have since eased, and investors have been encouraged by Microsoft's efforts to turn its Copilot AI assistant into a product for enterprise customers. Morganlander said: "There are still concerns about a 'SaaS apocalypse,' but Microsoft seems less vulnerable to those issues. At the same time, people are impressed by the adoption and integration of Copilot."

Still, although this quarter's gains pushed Microsoft into positive territory for the year, its year-to-date increase of 6.1% remains well behind the Nasdaq 100's 20% gain. JoAnne Feeney, a portfolio manager at Advisors Capital Management, said: "Microsoft surged this quarter because people made a mistake. Investors realized they had misjudged the company's potential, so much of the rally is simply a correction of that error."

Even so, rising optimism has made Microsoft a Wall Street favorite. Analysts are overwhelmingly bullish, with only three not giving a buy rating and none giving a sell rating. The average analyst price target implies the stock will rise about 11% over the next 12 months. Last week, Stifel upgraded Microsoft to buy, with analyst Brad Reback saying the company has "clearly turned a corner" and that its momentum in the second half should continue. He added that he is "increasingly comfortable with the company's ability to sustain mid-to-high-teens revenue growth."

Adam Wood of Morgan Stanley expects Microsoft to deliver a total return of about 20% over the next year, citing its long-term growth potential and the company's recent decision to raise its dividend. In a September 16 report, he wrote: "Combined with high-teens EPS growth, this supports Microsoft in achieving durable high-teens total returns, constituting an attractive risk-reward ratio."

On earnings expectations, Microsoft's revenue is projected to grow 18% in fiscal 2027, roughly in line with fiscal 2026; Wall Street expects revenue growth to reach 21% in fiscal 2029. On earnings per share, growth is expected to be about 11% this fiscal year, below the nearly 32% growth in fiscal 2026, but it is expected to approach 19% in fiscal 2028 and reach 21% in fiscal 2029. On valuation, Microsoft trades at about 25 times forward 12-month earnings, which is not cheap but below its 10-year average of 27 times. Among the largest tech stocks by market value, only Apple carries a higher valuation. Feeney said: "Some people want to see more Copilot adoption or more features, but the adoption momentum is still accelerating, and some recent announcements have been positive. Still, Microsoft needs to keep delivering."