MSFT Stock in Focus; Here’s What to Expect From Microsoft Q2 FY26 Earnings

Microsoft heads into earnings day with a familiar narrative but higher stakes. The company is no longer just being judged on growth, it is being judged on whether its massive AI and cloud investments can convert into durable revenue, sustained margins, and long term leadership. After a volatile few months for big tech stocks, Microsoft’s Q2 FY26 earnings on January 28 could reset investor sentiment around Azure, Copilot, and its AI strategy .

Let’s break down with this blog what to expect from Microsoft’s Q2 FY26 earnings, key developments since last quarter, analyst expectations, and the signals investors will track closely.

The Street’s Expectations from Microsoft: Strong Growth, High Bar

Wall Street is forecasting another solid quarter for Microsoft, with consensus estimates calling for revenue of roughly $80.3 billion, up about 15% YoY, and EPS near $3.87 to $3.91, representing around 21% growth from last year’s comparable quarter .

The Intelligent Cloud segment, home to Azure, is expected to remain the biggest swing factor. Analysts project cloud revenue growth of about 27%, with Azure specifically growing near 37% YoY, albeit slightly slower than the prior quarter’s pace .

Microsoft’s ability to meet or beat these expectations matters because investor confidence in AI monetization is being tested across the industry.

Azure and AI: The Core Narrative of Microsoft

Azure remains the centerpiece of Microsoft’s growth story. Demand for cloud compute tied to AI workloads, OpenAI usage, and enterprise migrations continues to be robust. However, growth is increasingly constrained by capacity and infrastructure availability rather than demand, according to multiple analysts .

Since the last earnings release, Microsoft has expanded data center capacity, pushed forward with custom AI chips, and continued investing heavily in infrastructure. Investors will be listening for commentary on:

• Whether Azure growth reaccelerates or continues to modestly decelerate.
• Progress on easing compute bottlenecks.
• Early monetization signals from Copilot across Microsoft 365, GitHub, and enterprise software.
• Adoption trends in AI-powered productivity tools.

Any upside surprise in Azure growth could meaningfully shift sentiment, given concerns around slowing cloud expansion industry-wide.

Capital Expenditure and Margins: A Key Tension

One of the biggest debate points around Microsoft right now is how much AI infrastructure spending will weigh on margins and free cash flow.

Microsoft’s capital expenditure surged to nearly $35 billion in Q1 FY26, and management has previously signaled that AI-related capex will continue rising in fiscal 2026 .

Investors will focus on:

• Whether capex continues climbing or stabilizes.
• How AI spending impacts operating margins, especially in the cloud.
• Whether Microsoft can offset infrastructure costs with pricing power, software margins, or operational efficiency.

The company has highlighted internal innovations such as power efficiency improvements and next-generation data center cooling, which could help protect margins despite heavy spending.

Remaining Performance Obligations and Backlog Strength

Another underappreciated metric heading into Microsoft’s earnings is Remaining Performance Obligations (RPO), a key forward indicator of contracted revenue visibility. 

In the previous quarter, Microsoft reported over $200 billion in RPO, with more than 60% expected to be recognized as revenue within the next 12 months. This quarter, analysts are forecasting a double-digit quarter-over-quarter increase in RPO, driven largely by multi-year AI and cloud contracts, including large-scale compute agreements tied to OpenAI and enterprise customers committing to long-term Azure capacity. 

If Microsoft reports a material RPO expansion again, it would further validate that its AI-driven demand is not short-term or speculative, but backed by long-duration, legally binding contracts with predictable revenue realization.

MSFT Stock Performance, Valuation, and Market Sentiment

Microsoft’s stock has been volatile in recent months, falling after its last earnings before rebounding ahead of the report. Options markets currently imply a roughly 5% post-earnings move in either direction, underscoring how pivotal this update could be .

Despite short-term concerns around spending and valuation, most Wall Street analysts remain bullish, with a strong Buy consensus and average price targets implying close to 30% upside from recent levels. As per INDmoney, based on 66 analysts, 93.94% of analysts recommend a 'BUY' rating for Microsoft Corporation with average target price of $615.63, implying a 28% upside from recent levels.

However, some firms have trimmed price targets, not due to Microsoft’s fundamentals, but due to broader multiple compression across large-cap software stocks.

What Investors Should Watch on the Call

Beyond headline revenue and EPS, Microsoft’s earnings call will be closely parsed for qualitative signals. Key areas to track include:

• Azure growth commentary and forward guidance.
• Updates on AI monetization, Copilot pricing, and enterprise adoption.
• Management’s tone on capex discipline and ROI on AI investments.
• Cloud margin trends and cost efficiency efforts.
• Any updates on custom AI chips, infrastructure expansion, or strategic partnerships.

Microsoft is no longer just being evaluated as a cloud company. It is being evaluated as a long-term AI platform with the scale, capital, and distribution to define enterprise computing for the next decade.

Bottom Line

Microsoft’s Q2 FY26 earnings arrive at a moment when investors want proof, not promises. Strong revenue growth, resilient Azure performance, disciplined AI spending, and improving monetization could reinforce Microsoft’s position as the most strategically advantaged company in enterprise AI.

If management can demonstrate that heavy investment today translates into scalable profits tomorrow, MSFT could regain narrative momentum. If not, questions around spending intensity and cloud growth durability may resurface.

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