What happened
Microsoft(NASDAQ:MSFT)shares closed 3.3% lower on Tuesday after the U.S. Department of Labor reported that producer price inflation hit a historic high in November, up 9.6% from a year ago. This news came on top of a reported 6.8% jump in consumer prices that came out yesterday -- the fastest rate of price growth in 40 years.
So what
Reporting on Microsoft's price decline, Bloomberg drew a direct line from the inflation data to the weakness in Microsoft's stock price. But why exactly is inflation bad news for Microsoft (and other tech stocks as well)?
Think about it this way: Right now, analysts who track Microsoft stock are forecasting that the company will grow its earnings by about 15% annually over the next five years. But if inflation eats up nearly 10% of that 15%, then Microsoft's real earnings won't actually be growing by 15% but only by 5%.
That's assuming inflation continues rising at the rate it's currently rising of course -- which isn't certain. By the same token, though, it's also not certain that inflation won't rise faster than 10%.
Now what
Granted, the Federal Reserve will probably work to get inflation rates under control, but even there, the news isn't all great because the Fed's primary tool for containing inflation is raising interest rates.
The Fed is meeting today and tomorrow, by the way, to set policy on inflation (and interest rates). If they decide to raise rates, then that's likely to slow the economy and potentially also slow the rate at which Microsoft's profits are expected to grow -- which would result in no net benefit to Microsoft's real earnings growth.
This, in a nutshell, is why Microsoft closed the day down and why $82.5 billion worth of Microsoft's market capitalization just went up in smoke.