1 Reason Microsoft Stock Could Outperform the Market in 2026

Microsoft (MSFT +2.00%) hasn’t had a great start to 2026. Its stock recently was down 11% for the year, with the bulk of that fall coming after its second-quarter fiscal year 2026 earnings report, when it declined 10% in a single day.

This decline will make it difficult to outperform the market in 2026, as the stock doesn’t get the benefit of starting at its current low price tag. It must make up the ground it has lost. The S&P 500 (^GSPC +1.97%) is up a mere 1%, so it doesn’t have a ton to make up. Still, it won’t be easy for Microsoft.

However, I think there’s one clear reason why Microsoft can still outperform the market in 2026, and it all revolves around Azure.

Cloud computing is the key to AI

Azure is Microsoft’s cloud computing division. Cloud computing plays a huge role in AI, as upstarts and developers cannot afford to build a massive data center filled with the necessary computing equipment to train and run an AI model properly. Instead, big tech companies like Microsoft are building excess computing capacity, then renting it to their clients. As long as Microsoft can build the data centers, buy the expensive computing units, and then operate them for less than what they charge, it’s a huge opportunity for Microsoft.

Unfortunately, we don’t know what the economics of Azure’s business are, because Microsoft doesn’t individually break out its profits by division. However, two of Azure’s competitors, Amazon Web Services (AWS) and Alphabet‘s Google Cloud, do. During the first quarter, AWS delivered a 35% operating margin. Google Cloud’s operating margins were 24% during the same period.

So I think it’s safe to assume that Azure’s operating margins are likely within 25% to 35%. Compared to Microsoft’s overall operating margin of around 47%, this means that Azure could be a drag.

MSFT Operating Margin (TTM) data by YCharts.

However, Azure’s operating margin may be better than its peers’. There’s just no way to be certain. Regardless, Azure is Microsoft’s fastest-growing segment, increasing its revenue at a 39% pace during Q2 (ended Dec. 31, 2025). Management also noted that Azure’s growth rate could have been faster if it had used the computing capacity that came online during Q1 and Q2 for external use rather than internal.

Microsoft’s overall growth rate for Q2 was 17%. The next-fastest-growing segment was Microsoft 365 Consumer Cloud at 29% growth. Clearly, cloud computing is leading the way for Microsoft, and I think it will continue to do so for many years. Microsoft can still rise to outperform the broader market, and if it does, it will be because of its cloud computing platform.