A Michigan pension fund is accusing Microsoft of hyping up its artificial intelligence products and inflating its stock price last year, before a sharp drop in January.

The stock price's steep drop in January — and the continued decline over the months that followed — is the crux of the lawsuit. Lawyers for the plaintiffs wrote that Microsoft engaged in a scheme to deceive the market" and artificially inflated the stock price before its fall this year.

Microsoft, along with other tech titans, has pitched AI as the most transformative technology since the internet or electricity. In a race between corporate behemoths and mammoth startups, Microsoft and others are pouring billions into the costly technology to develop generative and agentic AI models and secure sizable shares of the market.

But Wall Street has grown wary of the eye-popping deals between companies and the investments that keep growing. After a stellar run in 2025, Microsoft's stock price has slid this year by almost 17%.

In a proposed class action lawsuit filed Friday in a federal court in Seattle, the St. Clair Shores Police and Fire Retirement System said Microsoft misrepresented its AI-driven cloud computing revenue growth for its 2025 fiscal year, which ended on June 30, 2025. Microsoft reported that the cloud computing division Azure's revenue had grown by 34% from the year before and that Azure would continue to drive growth at Microsoft.

But during Microsoft's earnings call early this year, the company reported slower Azure growth. Microsoft Chief Financial Officer Amy Hood attributed this to supply constraints for its AI technology as the company diverted its high-tech computer chips to research and development.

In January, after Microsoft reported its second quarter earnings, amid higher-than-expected spending and lower Azure revenue growth, the company's stock price fell by 10%. It was the biggest one-day drop for Microsoft in almost six years.

A Microsoft spokesperson said in an emailed statement that the company was aware of the complaint and believes the allegations are without merit.

"Microsoft stands by the integrity of its public statements and will vigorously defend itself in court, the spokesperson said.

The lawsuit, filed by Keller Rohrback on behalf of the pension fund, said that Microsoft's AI products like Copilot ranked poorly against competitors and the company was struggling to convert large percentages of its regular users to Copilot subscriptions.

At the same time, Microsoft's investments in AI — known as capital expenditures — ballooned above previous expectations for the first six months of its 2026 fiscal year. The company, which spent more than $88 billion on capital expenditures during its 2025 fiscal year, is on track to spend more than $144 billion this year. Microsoft's capital expenditures were above prior projections and exceeded Wall Street expectations.

Several C-suite executives are named as defendants in the lawsuit as well, including Hood, CEO Satya Nadella and executive vice president Rajesh Jha, who plans to retire this year.

Microsoft AI spending shows no signs of slowing down, though recently Wall Street has not reacted as negatively to the company as it did early this year. During the company's most recent earnings call in April, Hood disclosed that Microsoft's AI investments for the calendar year will be roughly $190 billion.

During that earnings cycle, Microsoft offered signals that AI demand was picking up. Azure revenue growth was up 40% year-over-year and the overall AI business was on track to bring in $37 billion in revenue for the 2026 fiscal year.

Wall Street reacted tepidly in early May with a slight bump in the stock price over the following few days. The price has since taken another steep drop and is down 16.7% on the year.

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