Microsoft (MSFT) Slid from the Threat of Margin Compression Due to AI

Soumya Eswaran Fri, May 29, 2026 at 9:09 AM EDT 3 min read **

• ^GSPC
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Auxier Asset Management, an investment advisory firm, released its first quarter 2026 investor letter. A copy of the letter is available to download here. Following a robust start to the year, the market was impacted by the Strait of Hormuz crisis. Concerns over AI disruption, excessive stock-based compensation, and high valuations caused the technology sector to decline, making it the worst-performing S&P 500 sector for the quarter. The conflict in Iran pushed energy prices higher, making the energy sector the top performer. Value stocks outperformed growth stocks, with the Russell 1000 Value Index rising 2.10%, while the Russell 1000 Growth Index fell 9.78%. Despite strong earnings, many software companies experienced declines of 30%-37% in Q1. Auxier Focus Fund’s Investor Class posted a 1.73% gain in the first quarter of 2026, with stocks up 2.00%. Meanwhile, the S&P 500 cap-weighted index decreased by 4.33%, and the equal-weighted index increased by 0.67%. The Fund’s focus remains on identifying businesses and managements that demonstrate a strong culture with heart and soul. In addition, please check the firm’s top five holdings to know its best picks in 2026.

In its first-quarter 2026 investor letter, Auxier Asset Management highlighted Microsoft Corporation (NASDAQ:MSFT). Microsoft Corporation (NASDAQ:MSFT) is a multinational software company that develops and supports software, services, devices, and solutions, holding dominant positions in software, cloud infrastructure, generative AI, and gaming. On May 28, 2026, Microsoft Corporation (NASDAQ:MSFT) stock closed at $426.99 per share. One-month return of Microsoft Corporation (NASDAQ:MSFT) was 3.03%, and its shares lost 7.25% over the past 52 weeks. Microsoft Corporation (NASDAQ:MSFT) has a market capitalization of $3.17 trillion.

Auxier Asset Management stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q1 2026 investor letter:

"Software-related stocks in the portfolio have been hit hard due to the threat of margin compression from artificial intelligence. Microsoft Corporation's** (NASDAQ:MSFT) 21.9% drop in the quarter was the worst decline since the 2008 financial crisis. They are spending $190 billion on AI-related capital expenditures in 2026 yet their AI Copilot product has failed to scale, with less than 15 million total paid seats. Google Gemini has successfully integrated their AI and captured the largest share of casual AI users with 2 billion people interacting with “Gemini-powered AI overviews” in Google Search every month. Microsoft has a large installed base with Fortune 500 companies. They have over $88 billion in cash on the balance sheet which is a huge competitive advantage. It is hard to bet against CEO Satya Nadella who took over in February 2014 and has a great record with the stock up over elevenfold."

** Story Continues Microsoft (MSFT) Stock: Truist Raises Price Target to $675, Reiterates Buy Microsoft Corporation (NASDAQ:MSFT) ranks second on our list of 40 Most Popular Stocks Among Hedge Funds. According to our database, 282 hedge fund portfolios held Microsoft Corporation (NASDAQ:MSFT) at the end of the first quarter, compared to 312 in the previous quarter. While we acknowledge the potential of Microsoft Corporation (NASDAQ:MSFT) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock**.

In another article, we covered Microsoft Corporation (NASDAQ:MSFT) and shared the list of strong buy stocks to buy and hold for the next 5 years. In addition, please check out our hedge fund investor letters Q1 2026 page for more investor letters from hedge funds and other leading investors.