Microsoft Downgraded by Stifel: Azure Slowdown Meets AI Spending Fears in 2026 Tech Reckoning

Stifel just cut its rating on Microsoft—cloud growth is cooling, and the AI money furnace might be running too hot.

The Azure Reality Check

Analysts flagged a tangible deceleration in the Azure cloud business. The engine that powered Microsoft's epic growth spurt is shifting gears, moving from breakneck expansion to a more measured—some might say worrying—pace. It's the classic tech story: what goes up must eventually plateau.

AI's Expensive Gambit

Then there's the AI question. Microsoft's massive bets on artificial intelligence, from Copilot to deep infrastructure partnerships, require staggering capital expenditure. Stifel's move signals a growing Wall Street anxiety: are the returns on this eye-watering spend materializing fast enough to justify the outlay? Or is this just another 'strategic investment' narrative to distract from near-term margin pressure?

The market's patience for 'growth at all costs' is wearing thin—even for a titan. When the cloud slows and the AI bills come due, even the bluest of chips can get a red mark from the analysts. A sobering reminder that in the end, every tech transformation gets a price tag, and someone always has to pay it.

Azure drags while AI spending eats into margins

Brad said clearly that Microsoft has no short-term push to lift the stock. “We see no near-term catalysts and expect the stock to be range-bound until either capex growth slows below Azure growth and/or Azure posts a significant acceleration,” he wrote.

Brad also said the company’s current capital expenditure is out of control compared to the actual performance of Azure, which is facing major issues.

He mentioned Azure supply problems, while Google Cloud just reported strong results. And now Anthropic is picking up speed too.

Brad added that with this growing competition, it’s unlikely that Azure will suddenly speed up. That’s a problem because Azure is supposed to be the engine driving cloud growth.

The analyst also flagged that Microsoft’s heavy AI spending is making it hard for the company to boost its profit margins. He warned that this spending is “likely to be a headwind” for operating leverage, and that investors shouldn’t expect a quick turnaround.

Brad’s new price target is way below the $600+ average Wall Street target, but clearly, he sees risks that others don’t want to talk about.

Traders dump software stocks as AI disruption spreads

What’s hitting Microsoft isn’t just a company-specific problem. The whole software sector is getting wrecked by panic over AI disruption.

A big exchange-traded fund that tracks software stocks has dropped 15% in the past seven trading sessions and was down another 0.7% in premarket trading Thursday. Traders are in full-blown sell mode.

Jeffrey Favuzza from Jefferies called it the “SaaSpocalypse.” “Trading is very much ‘get me out’ style selling,” he said. The wave of fear exploded this week when Anthropic launched a tool for in-house lawyers, and software stocks collapsed.

Legalzoom.com crashed 20%, CS Disco dropped 12%, Thomson Reuters lost 16%, and London Stock Exchange Group fell 13%.

And it didn’t stop there.

The Claude Cowork tool, launched in January, started this whole thing. Then Alphabet began rolling out Project Genie, which creates game worlds from text or images, and that dragged down even video-game stocks.

The S&P North American software index has now fallen for three straight weeks, ending January with a 15% loss, the worst since October 2008.

“I ask clients, ‘What’s your hold-your-nose level?’ and even with all the capitulation, I haven’t heard any conviction on where that is,” Jeffrey said. “People are just selling everything and don’t care about the price.”

Right now, Microsoft is still considered a favorite by most analysts, with 96% rating it a buy. But that didn’t stop the stock from taking a hit after Stifel broke ranks.

The downgrade, the weak Azure growth, the ballooning AI costs, and the wider software crash have all collided. It’s no longer just about Microsoft. It’s about whether software itself is still a SAFE bet in a world where AI is getting faster, cheaper, and scarier.

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