Microsoft (NASDAQ:MSFT) is poised to trail the S&P 500 for a third consecutive year, a rare occurrence for the tech giant. Including dividends, the company's stock has underperformed the index in 2024 and 2025, and 2026 is following the same trend. This would mark only the third time in Microsoft's history as a public company that it has lagged the market for three straight years, with previous streaks occurring from 2003 to 2005 and from 2010 to 2012.
Despite this underperformance, Microsoft's earnings per share have grown significantly, rising by 32% in fiscal 2026. The company's total return for 2026 stands at about 9%, compared to the S&P 500's 15%. Historically, Microsoft's stock has rebounded after similar lagging periods. Following the 2003-2005 streak, the stock tied with the index in 2006 and then outperformed in 2007. After the 2010-2012 streak, Microsoft's stock surged by 44% in 2013.
The key difference between the two past streaks lies in the valuation at the end of each period. At the end of 2005, Microsoft's stock was priced at around 23 times earnings, while at the end of 2012, it was priced at under 10 times adjusted earnings. The latter streak was followed by a much larger rebound. Currently, Microsoft's stock is trading at about 29 times fiscal 2026 earnings, which is higher than the levels at the end of the previous streaks.
Despite the lagging performance, Microsoft's business continues to grow. Revenue rose by 18% in fiscal 2026, to $331.8 billion. The company's earnings have outpaced the stock price, leading to a lower valuation. However, the current price-to-earnings ratio is still higher than it was at the end of the previous streaks. Analysts suggest that for Microsoft to catch up with the index, earnings will need to keep growing at their recent rate.