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Microsoft (NASDAQ:MSFT) has made money for shareholders in both of the past two years. It just hasn't kept up with the market. Including reinvested dividends, the shares gained around 13% in 2024 and about 16% in 2025. The S&P 500 (SNPINDEX:^GSPC) returned about 25% and 18% on the same basis.
This year looks similar so far. Shares trade near $525 as of this writing, for a 2026 total return of about 9%, versus about 15% for the index. And that's even after the stock gained almost 50% from its late-June close of about $353.
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If Microsoft finishes 2026 behind, it'd be a third straight year of trailing the index. It's happened just twice since the software giant went public in 1986 -- from 2003 through 2005, and from 2010 through 2012.
Both streaks eventually ended. But the year after each one looked very different.
I'm using total return for every year here, because it counts dividends. This matters for Microsoft, which announced a one-time special dividend of $3 a share (around $32 billion) in 2004. A price-only comparison would treat that cash as if shareholders never got it.
The first streak was costly. From the start of 2003 through the end of 2005, Microsoft returned around 15% all told, but the index returned about 50%.
And 2006 didn't bring the rebound some shareholders might have hoped for. Microsoft and the index both returned around 16% that year, practically a tie. Microsoft didn't move clearly ahead until 2007, when it returned about 21% in a year the index returned about 5%.
The second streak was worse. From 2010 through 2012, Microsoft shareholders lost around 6%, but the index gained about 36%.
Then the stock soared, returning about 44% in 2013 versus the index's 32%. This was also the year CEO Steve Ballmer announced he'd retire within 12 months.
One difference stands out to me: the price investors were paying for Microsoft's earnings when each streak ended.
At the end of 2005, the stock closed at around $26, or about 23 times earnings, based on the $1.12 per share Microsoft earned in fiscal 2005. Revenue had risen 8% that fiscal year.
Seven years later, Microsoft closed 2012 at around $27 -- almost the same price. But it cost much less relative to profits.
Fiscal 2012 earnings per share came in at $2.00, putting the stock at around 13 times earnings, and that number included a $6.2 billion goodwill impairment charge. Microsoft's non-GAAP (adjusted) number, which leaves out the charge and a revenue deferral, was $2.78 per share. By that measure, the stock cost under 10 times earnings.
Sure, two cases don't make a rule. But the streak that ended with the cheaper stock was followed by the much bigger year. Put another way, the starting price might have mattered more than the streak itself.
This streak hasn't come from a slumping company. Earnings per share rose from $11.80 in fiscal 2024 to $13.64 in fiscal 2025 and $17.95 in fiscal 2026 (the 12 months ended June 30, 2026). That latest gain of 32% was helped by Microsoft's OpenAI investment. Excluding it, adjusted earnings per share still grew 22%.
With profits climbing faster than the stock price, the valuation has fallen. Microsoft closed 2024 at around 36 times fiscal 2024 earnings and finished 2025 near 35 times fiscal 2025 earnings. Now, it costs about 29 times fiscal 2026 earnings.
The business is also growing faster than it was at the end of each past streak. Revenue rose 18% in fiscal 2026, to $331.8 billion, which is over double fiscal 2005's growth rate.
But 29 times earnings is a steeper price than Microsoft had at the end of 2005 or 2012 -- around three times the 2012 level on an adjusted basis.
Ultimately, a lagging streak hasn't been a good reason to give up on Microsoft stock before. Each time, the next year tied or beat the index, and after the second streak, it beat the market by a big margin.
But 2013 started with a stock that cost under 10 times adjusted earnings. Today's starting price-to-earnings ratio is far higher. For Microsoft to catch up with the index this time, I think earnings will probably need to keep growing near their recent rate, because the valuation might have less room to rise.
That looks like a reasonable bet on a company growing this fast, so the streak wouldn't lead me to sell. I just wouldn't call the stock the sort of bargain it was at the end of 2012.
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Microsoft Stock Is on Track to Trail the S&P 500 for a 3rd Straight Year. History Says What Happened After Its Last 2 Streaks. was originally published by The Motley Fool
