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 amid growing enterprise caution.

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

Microsoft climbed on Monday after Melius Research upgraded the software giant to Buy, calling it "the adult in charge" as businesses grow more cautious about how they deploy artificial intelligence.

An upgrade with a memorable line

Microsoft (NASDAQ:MSFT) climbed on Monday, Oct. 5, 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 shares put around $527.29 by one account and around $525.18 by another, but all showed a solid rise.

Melius described Microsoft as "the adult in charge" when it comes to AI security and governance. The call comes as large companies grow more worried about the risks of rolling out AI across their businesses.

Microsoft is a member of the Dow Jones Industrial Average, and its gain helped the blue-chip index finish higher.

Why governance matters

Businesses are racing to use AI tools, but many are wary about data leaks, errors and compliance problems. A company that can promise secure, well-managed AI systems has an edge when selling to banks, hospitals, governments and other cautious customers.

Microsoft already sells widely to large companies through its Office software, Azure cloud platform and security products.

The company's recent results give the bulls more to point to. In its fiscal fourth quarter, Microsoft reported strong growth in Azure, and its commercial remaining performance obligation, a measure of contracted future revenue, rose sharply to $678 billion.

Big tech diverges

Not all of Microsoft's large peers joined in. Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) were little changed. But Nvidia (NASDAQ:NVDA) rose to a record high with a market value of about $5.76 trillion, and Meta Platforms (NASDAQ:META) led the communication services sector higher at midday.

Within the Dow, Visa (NYSE:V) was the best performer and UnitedHealth Group (NYSE:UNH) was third-best. At the other end, Merck (NYSE:MRK) was the worst performer and Salesforce (NYSE:CRM), another big software name, was the second-worst. Elsewhere in software, Schneider Electric's $205-a-share cash offer for PTC (NASDAQ:PTC) lifted engineering-software names, while HubSpot (NYSE:HUBS) slipped after Raymond James downgraded it.

A record day for the Nasdaq

The broader market was strong. The Nasdaq Composite climbed 286.45 points to a record close of 27,477.31, and the Nasdaq-100 also set a record at 31,076.44. The S&P 500 rose 51.23 points to 7,773.95, just shy of its summer record, and the Dow added 90.94 points to 51,267.90.

The gains came despite rising bond yields. The 10-year Treasury yield climbed to its highest close since 2002, as inflation worries lingered. The ISM services prices-paid index rose to its highest level since July 2022.

Daniela Hathorn of 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."

That softer outlook came from Friday's jobs report, which showed only 29,000 jobs added in September. Traders now see roughly a one-in-four or smaller chance of an October Federal Reserve rate hike, down from better than even a week ago.

What to watch

Microsoft's next quarterly report will show whether Azure growth and AI demand are keeping pace with expectations. Investors will also watch for other analysts to weigh in on the AI governance theme. On the macro calendar, the Federal Reserve releases minutes from its September meeting on Wednesday, Oct. 7, at 2pm ET, and the Fed meets again on Oct. 27-28. Big bank earnings starting Oct. 13 kick off the third-quarter reporting season.