What Happened to Microsoft (MSFT) on Tuesday?

Microsoft (MSFT -3.26 percent ) shares fell 3.3 percent on (14 December) Tuesday after the U.S. Department of Labor reported that producer price inflation hit a historic high in November, rising 9.6 percent from the previous year. This news comes on the heels of a 6.8 percent increase in consumer prices reported yesterday – the fastest rate of price growth in 40 years.

Bloomberg, in reporting on Microsoft’s price decline, from $339.4 on 13 December to $328.34 on 14 December, drew a direct line from the inflation data to Microsoft’s stock price weakness. But why is inflation bad for Microsoft and similar technology stocks?
Analysts who follow Microsoft stock predict that the company’s earnings will increase by about 15% per year over the next five years. However, if inflation consumes nearly 10% of that 15%, Microsoft’s real earnings will only grow by 5%, rather than 15%.
Granted, the Federal Reserve will most likely work to keep inflation under control, but even so, the news isn’t all good because the Fed’s primary tool for doing so is raising interest rates.
By the way, the Fed is meeting Tuesday and Wednesday (14 and 15 December) to decide on interest rate and inflation policy. On Wednesday, the central bank will issue a statement outlining its quarterly forecasts for the economy, inflation, and interest rates. If they decide to raise rates, the economy will likely slow, as will the rate at which Microsoft’s profits are expected to grow – resulting in no net benefit to Microsoft’s real earnings growth. This is why Microsoft ended the day and $82.5 billion of Microsoft’s market capitalization just vanished.

Written by Masud

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