Microsoft Earnings Selloff Sinks Nasdaq

Microsoft’s earnings selloff followed its Jan. 29, 2026, fiscal second-quarter report as traders focused on a sharp rise in capital spending tied to AI infrastructure, pushing the Nasdaq lower and raising questions about returns on that investment.

Strong Cloud Growth Accompanied by Capacity-Limited Guidance

Microsoft Corp. (MSFT) reported fiscal second-quarter revenue of $81.3 billion, a 17.0% increase year over year that exceeded the $80.3 billion consensus. Non-GAAP earnings per share came in at $5.16, well above the $3.92 estimate. The results reflected sustained demand despite investor concerns about the company’s spending plans.

The cloud business remained the main growth driver. Microsoft Cloud revenue rose to $51.5 billion from $40.9 billion a year earlier. The Intelligent Cloud segment, which includes Azure, generated $32.9 billion, beating the $32.2 billion forecast. Productivity and Business Processes revenue reached $34.1 billion, above the $33.6 billion estimate. More Personal Computing reported $14.3 billion, roughly in line with expectations. Azure grew 38.0% on a constant-currency basis in the quarter. Management guided 37.0% to 38.0% constant-currency growth for the March 2026 quarter, describing that outlook as allocated capacity, signaling internal resource limits.

Capital Spending Surge Drives Market Reaction

Capital expenditures surged 66.0% year over year to $37.5 billion, fueled by investments in AI infrastructure and data-center expansion. This sharp increase refocused investor attention on near-term returns as Microsoft scales the systems needed to support advanced AI services.

Contracted unrecognized revenue, or remaining performance obligations, stood at $625 billion, with about 45% tied to commitments linked to OpenAI. This backlog provides visibility into future revenue but concentrates a large share of deliverables around AI projects and partner commitments.

Shares dropped as much as 12.0% after the earnings release, triggering a broad selloff in software and related technology stocks. The Nasdaq tested its 50-day moving average support, while broader indexes showed mixed results. The decline reflected investor concern that the recent spending surge and capacity-framed guidance could pressure returns despite strong cloud demand.

The scale of capital spending and the capacity-based outlook heightened scrutiny of near-term returns on Microsoft’s AI investments, tempering enthusiasm for a stock that had been buoyed by robust cloud metrics.