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It was a tough past week for the AI trade and the broad markets, to say the least. But it’s always nice to finish things on a high note, with the S&P 500 and Nasdaq 100 both shooting higher (both closing Friday’s session up less than 1%), thanks in part to good Nvidia (NASDAQ:NVDA) numbers and constructive commentary from its CEO Jensen Huang as well as some encouraging comments from the Fed’s John Williams, who sees “room for a further adjustment” (that adjustment would be a 25 bps rate cut) next month.
Undoubtedly, just when you thought another cut would be off the table, it seems like the odds are marching higher again, thanks in part to an employment picture that isn’t all too hot. Though time will tell how markets fare from here, as we’ve seen optimism and positivity in relatively small bursts of late. Either way, it looks like investors should buckle their seatbelts for more volatility in both directions.
The sudden bursts of enthusiasm might not be over if investors get what they want
While the initial excitement from Nvidia’s record quarter faded quickly, there’s a lot to be optimistic about going into year’s end, especially if the Fed ends up slashing rates in December. If expectations are so incredibly high for AI winners like Nvidia, perhaps it takes not only confirmation that AI demand is robust enough to rule out a bubble, but also the prospect of more rate cuts from the Fed. Could it be that markets need assurances of no AI bubble and more rate cuts to proceed higher? Possibly.
Either way, investors might get both going into December, perhaps leading to a holiday relief rally, or a Santa rally, if you prefer. And moving into 2026, a “bad news is good news” kind of scenario could play out in a bigger way, as weaker employment data and news of more AI layoffs increase hopes for more interest rate cuts and a further reining in of AI spending, respectively.
In any case, after a rocky November of trade and lower multiples on a number of the most heated names, perhaps most AI stocks now find themselves on a more stable footing, especially if the Fed gives markets what they really want for the holidays. And if the heaviest-spending AI tech titans respond to the recent market action by adjusting their AI budgets accordingly, perhaps the bull market might not be over with just yet, even though AI bubble talk is arguably at an all-time high right now.
Microsoft
Microsoft (NASDAQ:MSFT) looks oversold and due for a ricochet after viciously plunging close to 13% since its late-October highs. With Microsoft shares moving lower on Friday’s upbeat session for tech, there’s serious concern that the $3.5 trillion behemoth might be one of the fastest-falling knives in all of mega-cap tech.
Of course, Bill Gates’ massive share sale in the third quarter is a bit concerning, as are the company’s hefty AI spending patterns. Add last week’s untimely downgrade into the equation, and it’s not a mystery as to why Microsoft is down 10% in the past month.
With the enterprise software giant falling in the market cap leaderboards, perhaps it’s time to move on from a former Mag Seven darling that’s since seen its momentum slow. After the latest correction, shares of Microsoft are now at risk of lagging the Nasdaq 100. With a nasty double-top technical pattern that could entail a move to $450 per share or so, investors might be wise to hold off on buying the AI juggernaut, especially as a new class of AI winners rise to the occasion.
Though I have no idea what will turn the tide, I am a fan of the valuation to be had with shares close to $470 per share. Microsoft stock trades at a very reasonable 33.5 times trailing price-to-earnings (P/E), or about 30.5 times forward P/E. Not a bad price to pay for one of the greatest workplace AI innovators.
Though perhaps less exciting than an Alphabet (NASDAQ:GOOG), which is now a larger company than Microsoft, I do think there’s value to be had here, especially as it looks to floor it with Azure while steering Copilot further into the agentic AI age. If you’re looking for an AI agent winner in the enterprise, I think it’s tough to pass up the name here, even if it means taking more of a hit over the coming weeks and months.