What happened
Microsoft (NASDAQ: MSFT) Shares closed down 3.3% on Tuesday after the US Department of Labor reported that producer price inflation hit an all-time high in November, up 9.6% from a year ago. one year old. This news comes on top of a 6.8% increase in consumer prices announced yesterday, the fastest rate of price growth in 40 years.
Image source: Getty Images.
So what
Reporting on Microsoft’s price decline, Bloomberg drew a direct link between inflation data and Microsoft’s stock price weakness. But why exactly is inflation bad news for Microsoft (as well as other tech stocks)?
Think of it this way: Right now, analysts who track Microsoft’s stock predict the company will grow its earnings by about 15% a year for the next five years. But if inflation absorbs nearly 10% of that 15%, then Microsoft’s real profits will not increase by 15% but only by 5%.
This assumes that inflation continues to rise at the rate it is currently rising, of course – which is not certain. In the same way, however, it is also not certain that inflation will not rise. faster by 10%.
Now what
Granted, the Federal Reserve will likely strive to get inflation rates under control, but even there the news isn’t all good as the Fed’s primary tool for containing inflation is to raise interest rates.
By the way, the Fed is meeting today and tomorrow to set policy on inflation (and interest rates). If they decide to raise rates, it will likely slow the economy and potentially also slow the rate at which Microsoft’s earnings are expected to grow, resulting in no net benefit to Microsoft’s actual earnings growth.
This, in a nutshell, is why Microsoft closed the day and why $82.5 billion of Microsoft’s market cap went up in smoke.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a board member of The Motley Fool. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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