Key Highlights

● Melius Research upgraded Microsoft to Buy from Hold and set a $665 price target.

● The firm called Microsoft "the adult in charge" on AI security and governance.

● Microsoft's commercial remaining performance obligation rose to $678 billion in its latest quarter.

Microsoft rose on Monday, Oct. 5, after Melius Research upgraded the stock to Buy with a $665 target, betting that companies nervous about AI risks will turn to the software giant.

The upgrade

Microsoft (NASDAQ:MSFT) rose on the Nasdaq-100 on Monday after Melius Research upgraded the stock to Buy from Hold and set a $665 price target. Reports differed slightly on the size of the gain, with some putting the shares at $527.29 during the session and others near $525.18 close to the close.

Melius built its case around AI security and governance. The firm called Microsoft "the adult in charge" at a time when enterprises are worried about how to deploy AI safely.

That argument is about trust. Big companies want AI tools, but they also want guardrails on data, privacy and compliance. The upgrade suggests Melius sees Microsoft as well placed to meet that demand.

Microsoft has been posting strong cloud results. In its fiscal fourth quarter, its Azure cloud Business grew sharply, and commercial remaining performance obligation, a measure of contracted future revenue, rose to $678 billion.

Those figures suggest customers are signing long-term commitments, which supports the AI growth story that analysts like Melius are focused on.

Mega-caps lead the market

Microsoft's gain was part of a broader rally in mega-cap AI stocks. Nvidia (NASDAQ:NVDA) rose to a record close and a Market Value of about $5.7 trillion. Meta Platforms (NASDAQ:META) led communication services higher. Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) were little changed.

The Nasdaq-100 closed at a record 31,076.44, and the Nasdaq Composite jumped 286.45 points to a record 27,477.31. The S&P 500 added 51.23 points to 7,773.95, just shy of its summer record. The Dow, where Microsoft is also a member, rose 90.94 points to 51,267.90.

A tricky rate backdrop

The rally came despite rising borrowing costs. The 10-year Treasury Yield climbed to its highest level since 2002 as Monday's ISM services prices-paid index hit 74.0, the highest since July 2022.

Friday's weak September jobs report helped. Payrolls rose just 29,000, cutting bets on an October Fed hike to roughly one in four or less.

Daniela Hathorn, senior market analyst at Capital.com, said: "growth stocks are rallying because Fed expectations have softened, while the Risk-Free Rate against which those valuations are judged remains exceptionally high."

Not every software stock benefited. Salesforce (NYSE:CRM) slid on the Dow, and HubSpot (NYSE:HUBS) fell after Raymond James downgraded it. Engineering-software stocks got a lift from Schneider Electric's $205-a-share deal to buy PTC (NASDAQ:PTC).

That split shows investors are being selective, rewarding companies they see as clear AI winners.

Earnings ahead

Analysts expect third-quarter S&P 500 Earnings growth to be strong, largely driven by AI stocks. Robert R. Pires, chief Investment officer at BIAS Investors, said: "Commentary on energy prices, inflation, hiring plans, and the adoption of artificial intelligence should also give a clearer picture of where the economy is headed."

Microsoft's Dow membership also gave the Blue-Chip index some support on a day when it otherwise struggled, with health care names such as Merck and Johnson & Johnson (NYSE:JNJ) among the laggards.

What to watch

Minutes from the Fed's September meeting are due Wednesday, Oct. 7 at 2 p.m. ET, and the Fed meets again Oct. 27 to 28. Earnings season begins with PepsiCo on Thursday, Delta Air Lines on Friday and the big banks from Oct. 13.

For Microsoft, the next key test is its next quarterly report, where Azure growth and AI Demand will be in focus.