Why the market has applauded the latest results from Microsoft and Meta

• Microsoft and Meta shares rise in pre-market trading in response to latest results
• Microsoft has now beaten or met earnings expectations for every quarter since April 2016
• AI remains important, but it's not the only driver for Microsoft
• Microsoft is reaping the benefits of the Minecraft movie success
• Meta to increase capex in a surprise move

"Microsoft and Meta's better than expected results should help quash any fears that the Magnificent Seven group of tech companies have gone off the boil," says Dan Coatsworth, investment analyst at AJ Bell.

"The positive market reaction in pre-market trading to Microsoft's and Meta's numbers represents a turning point for mega cap tech stocks which have endured a poor showing year-to-date.

"Investors were losing interest for fears that the AI bubble might be about to burst or at least experience a slowdown. The chaos caused by Donald Trump's policy decisions also led to investors being less willing to pay high multiples of earnings for US growth stocks. That's made big tech less attractive to investors as they look for value opportunities in other parts of the world such as Europe.

"There was also the fear that a bleak economic backdrop would lead to companies cutting spending on AI and that could hurt cloud computing demand, impacting Microsoft. The same economic situation also troubled investors that advertising demand would fall, impacting Meta.

"These are all valid concerns and while both Microsoft and Meta have effectively shrugged them off in their latest results, the risks haven't gone away."

Recurring revenue benefits

"What makes Microsoft more resilient than Meta is its recurring revenue from businesses and consumers who licence its software. No matter what's going on in the economy, these payments will keep trickling in. In contrast, advertising is a discretionary spend and companies can turn off the promotional tap at the click of a finger if they think weaker economic conditions will lead to lower spending by their customers. There's not a lot that Meta can do about that.

"As it stands, both Microsoft and Meta gave enough reassurance to the market for investors to kick their worries down the road and focus on the here and now."

Lower bar to clear for Microsoft

"Microsoft's shares jumped more than Meta in pre-market trading because the core drivers of its business weren't limited to AI, and that shows it isn't reliant on this tech revolution to stay on top.

"Interestingly, Microsoft's earnings forecasts for 2025 and 2026 had been steadily downgraded for past 12 months or so. Therefore, one could suggest that it had a lower hurdle to clear at the latest quarterly results compared to Meta whose forecasts had been steadily upgraded over same period - until a month ago.

"It looks like Microsoft is the master of expectations management. It has either met or beaten earnings forecasts in every quarter since April 2016, which is a truly impressive achievement.

"The Q1 2025 figures reassured on multiple levels. The cloud computing arm ticked over nicely, with Microsoft flagging that the 'real outperformance' in the Azure business came from non-AI operations."

Minecraft joy

"The gaming operations got a boost from the success of the Minecraft movie with cinemagoers jumping up and down in their seat shouting 'chicken jockey' at the screen.

"Microsoft owns the IP and has seen a 75%-plus increase in weekly active users of the Minecraft game year-on-year since the film's release.

"Microsoft bought Mojang - the original developer of Minecraft - for $2.5 billion in 2014. That looked a high price at the time but now seems to be a smart deal. The game's popularity has soared in recent years and Microsoft is sweating the assets through limited additional cost such as via the movie which could easily become a franchise and via toys and merchandise."

Meta to increase spending

"Meta has been reaping the benefits of AI in its business as it has helped to direct more relevant content to users of its social media networks, keeping them engaged and serving up more adverts.

"Guidance that it will increase spending in the business is brave given the uncertain economic backdrop but shows that Meta is looking at the long-term prize. If it doesn't strengthen capabilities now or slows down the pace of capex spending, others could eat its lunch.

"Meta has now beaten earnings expectations for nine quarters in a row. The share price bounce in pre-market trading means it is now close to recovering all the share price losses year-to-date. The rally in both Microsoft and Meta post-results should also provide a tailwind to drive the broader US market, whose recovery from the Liberation Day global sell-off is currently lagging many other parts of the world."