Microsoft stops relying on Chinese engineers for Pentagon cloud support
The company implemented the changes in an effort to reduce national security and cybersecurity risks stemming from its cloud work with a major customer. The announcement came days after ProPublica published an extensive report describing the Defense Department's dependence on Microsoft software engineers in China.
"In response to concerns raised earlier this week about US-supervised foreign engineers, Microsoft has made changes to our support for US Government customers to assure that no China-based engineering teams are providing technical assistance for DoD Government cloud and related services," Frank Shaw, the Microsoft's chief communications officer, wrote in a Friday X post.
The change impacts the work of Microsoft's Azure cloud services division, which analysts estimate now generates more than 25% of the company's revenue. That makes Azure bigger than Google Cloud but smaller than Amazon Web Services. Microsoft receives "substantial revenue from government contracts," according to its most recent quarterly earnings statement, and more than half of the company's $70 billion in first-quarter revenue came from customers based in the U.S.
In 2019, Microsoft won a $10 billion cloud-related defense contract, but the Pentagon wound up canceling it in 2021 after a legal battle. In 2022, the department gave cloud contracts worth up to $9 billion in total to Amazon, Google, Oracle and Microsoft.
ProPublica reported that the work of Microsoft's Chinese Azure engineers is overseen by "digital escorts" in the U.S., who typically have less technical prowess than the employees they manage overseas. The report detailed how the "digital escort" arrangement might leave the U.S. vulnerable to a cyberattack from China.
Microsoft originally told ProPublica that employees and contractors were operating in adherence to U.S. government rules.
"We remain committed to providing the most secure services possible to the US government, including working with our national security partners to evaluate and adjust our security protocols as needed," Shaw wrote.
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While valuation multiples sit at elevated levels relative to history, constrained positioning indicates room for the recent equity rally to continue." Binky Chadha, chief global strategist, Deutsche Bank "While equity markets have recovered completely from their Liberation Day sell-off, equity positioning is only back up to neutral. Equity positioning tends to align with earnings growth but is currently still below what we expect for Q2 and we look for a typical earnings season rally. Both the company analyst consensus and DB forecasts see earnings growth dipping in Q3 as the full impact of tariffs hit, before picking up again. Our outlook out to year-end sees a rise in equity positioning as one of the drivers of further upside for equity prices." Venu Krishna, head of US equity strategy, Barclays "Heading into 2Q25 earnings season, Big Tech is once again trading at ~29x [forward earnings]. ... While this seems high at first take, the group is still trading ~2 turns below where it started the year because Big Tech is one of the only segments of the S&P 500 where an improved YTD earnings outlook is available at a better YTD price. US equity upside has broadened in 2025 — the percentage of SPX constituents beating the index has risen to the highest level in about 2 years — but most of these gains have been fueled by multiple expansion. Big Tech is the rare exception. ... With [the second quarter of 2025] poised to be the first quarter to see material impacts from incremental tariffs, Big Tech retains an outsized role in keeping overall SPX performance healthy, and we believe the group is well-positioned to do so." Read more: Live coverage of corporate earnings Barry Bannister, chief equity strategist, Stifel "While it's absolutely true Big Tech is much more profitable than the late-1990s Bubble, … the over-valuation is the same." Tom Lee, head of research, Fundstrat "Over the past five years, the market has survived six black swan events. If this were a company that had survived six near-extinction events and continued to prosper, its stock would be assigned a higher multiple. However, the equal-weight S&P 500 P/E has actually declined from 17.6x (pre-COVID) to the current 16.9x. If the market is truly indestructible, there's still plenty of room for multiples to rise." Savita Subramanian and Jill Carey Hall, BofA Securities equity and quant strategy "While the S&P 500 screens as statistically expensive on most valuation metrics we track, comparing today's multiple to prior cycles is apples to oranges, in our view, given the mix shift within the index. The S&P 500 has shifted from low-margin, asset- and labor-intensive industries (70% manufacturing in 1980) to high-margin, innovation-oriented industries (50% of the index today)." Keith Lerner, co-chief investment officer, Truist "A key question for the second half of the year is whether market leadership will broaden. Small- and mid-cap stocks remain well below prior highs, partly due to weaker earnings. A shift would likely require both economic improvement and broader earnings growth. Until trends improve, we continue to favor large-cap equities with a growth tilt." Citi equity strategy team led by Scott Chronert "This reporting season is critical for Small/Mid Cap and more cyclical sectors as earnings growth has been paltry for more than two years. However, Wall Street analysts have continued to model an uplift in fundamentals only to be continually disappointed. Good results this quarter and conviction in forward estimates are critical for investors to believe the return to positive EPS growth is near and for US stock market performance to broaden." Richard Bernstein, CEO, Richard Bernstein Advisors "Several points are worth noting in this chart: Nasdaq surges ahead of Dow Jones Utilities only during more speculative periods and bubbles. Utilities have underperformed Nasdaq by less than 65bp/year, even when including the current speculative Magnificent 7/AI period. Because such a large proportion of return comes from dividends, Utilities have achieved their returns with considerably lower volatility and beta. The DJ Utilities Index has a beta of only 0.5 to the Nasdaq during the 50+ year period, implying its risk-adjusted returns are superior to those of Nasdaq." Max Grinacoff, head of US equity derivatives, UBS "Valuations continue to price in AI-led 'profitability exceptionalism.' The US [equity market] is clearly 'expensive' to bonds unless growth expectations are met." Callie Cox, chief markets strategist, Ritholtz Wealth Management "Right now, investors are giving AI the benefit of the doubt. 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Prices for household equipment and furnishings, appliances, window and floor coverings, and toys experienced their largest gains since the early 2020s, while prices for computers, audio and video equipment, and apparel posted notable gains. "As of June, the average tariff rate was 15%, yet effective customs duties imply a realized rate closer to 10.1%. Strategies used by companies to avoid passing on cost increases to consumers — inventory front-loading, using bonded warehouses and foreign trade zones, reducing margins — are not eternal. As such, we should expect a muggy inflation summer." David Mericle, chief US economist, Goldman Sachs "We estimate that tariffs have boosted consumer prices by 0.2% cumulatively so far but think that the largest effects are still ahead of us. Tariff effects are likely to push core inflation back above 3% over the next year, despite an underlying trend that we see as steadily moving back to 2%. We expect tariffs to have only a one-time effect on the price level rather than igniting persistent high inflation and consequently expect inflation to resume its decline toward 2% down the road as the tariff effects drop out of the year-over-year calculation." Read more: What Trump's tariffs mean for the economy and your wallet Michael Reid, chief economist, RBC Capital Markets "This chart looks at the relationship between wages and profits and their respective shares of GVA [gross value added] (i.e., the contribution to GDP). This is an important relationship because wages represent the largest share of GVA, which has fallen below 50% for most of the last decade. At the same time, profits' share increased to all-time highs. Our concern is that tariffs will start to add pressure to margins (i.e., corporate profits will be squeezed if businesses absorb some of the tariffs and/or we see demand destruction). The result will likely be cost-cutting in the wages space (i.e., layoffs) to bolster profits." Mark Zandi, chief US economist, Moody's "Labor force growth is slumping. Given the new population controls, measuring labor force growth is tricky, but by my calculation, it's at a standstill. Behind this are the severe restrictions on immigration. This time last year, the foreign-born labor force was growing 5%. It's now declining. The native-born labor force remains moribund. The implications of a flagging labor force are disconcerting. It means serious disruptions to businesses that rely on immigrant labor, ranging from construction and agriculture to hospitality and retailing. It also means higher inflation, just when the higher tariffs are set to push up prices. The economy's real potential GDP growth — that pace of growth consistent with stable inflation — is also lower. It is currently closer to 1% than the 2% we have come to think of as typical. Think of what this means for everything from asset returns to our already dire fiscal outlook." Thomas Ryan, North America economist, Capital Economics "After curbing unauthorised immigration at the Southwest border, the Trump administration is now steadily increasing detentions and deportations. This crackdown is starting to impact labour supply: The foreign-born share of the labour force fell to 19.1% in June, down from a peak of 19.8% in March. That marks a decline of over 1 million people, at least partly due to stepped-up ICE enforcement. A recent large boost to ICE's budget in the One Big Beautiful Act suggests this trend will persist, keeping unemployment low even as job growth slows. That, in turn, supports our expectation that the Fed will hold interest rates steady this year." Nancy Vanden Houten, lead economist, Oxford Economics "Foreign-born workers made a huge contribution to labor force growth as the US emerged from the pandemic, helping to restore balance to the labor market and ease wage and inflation pressures. ... We think the trend will come to an end, however. The foreign-born share of the labor force declined in the second quarter of 2025. The labor force data for foreign-born workers can be noisy, so we shouldn't read too much into one quarter of data. Also, foreign-born workers typically don't enter the labor market immediately upon arriving in the US, so there still may be some growth related to those who arrived over the past few years. But we expect the Trump administration's immigration and deportation policies to result in a much lower pace of immigration over the next few years than we previously anticipated, and before too long, that will translate into slower growth in the foreign-born share of the labor force." Aditya Bhave, head of US economics, BofA Securities "Going forward, we think tighter immigration policy restrictions will reduce the breakeven pace of employment growth to about 70k (from 125k currently) for the next two years as the immigration supply shock plays out. Hence, we expect the [unemployment] rate to rise modestly, reaching 4.4% in 4Q 2025 and peaking at 4.5% in 1Q-3Q 2026 despite payrolls slowing down to 50k in [the second half of 2025] & 70k in 2026. Chair Powell has argued that the Fed's job is to manage aggregate demand in a manner that meets aggregate supply 'where it's at.' So, with the u-rate rising gradually in our forecast and core PCE inflation likely to reach 3% over the summer, we don't think the Fed will be able to cut rates this year." Ryan Detrick, chief market strategist, Carson Group "Household balance sheets are as in as good a shape as ever, with lower liabilities and higher asset values as a percent of disposable income. Two big reasons driving this are rising home prices and surging stock prices over the last 5 years. This likely says households are in very solid shape as we head into [the second half of 2025]." Thomas Simons, chief US economist, Jefferies "The Philly Fed's survey on consumer credit conditions increased from 31.7% in Q4 2019 to almost 36.7% in mid-Q2 2021. Obviously, this is one of the consequences of the COVID stimulus checks and the forbearance on student loans, and it might be easy to dismiss the surge as temporary and insignificant in the long run. However, the share has since come down to about 35.4%, which [is] off the highs but still well above levels that we were used to before the pandemic. The same Philly Fed survey reports that there are 584 million open accounts, so the increase to 35.4% paying their full balance from 31.7% means that households have 21.6 million fewer open accounts accumulating interest charges. 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In a recent note, we used last week's headlines around President Trump being ready to fire Powell as an event study to answer this question. Taking market moves around these news reports (i.e., a significant twist steepening of the curve) at face value, we find that the cost savings from lower front-end yields would be largely offset by higher long-term yields. Specifically, the Treasury would only save $12-15bn through 2027 if the President fired Powell, even if Treasury delayed coupon increases to skew more issuance towards bills." Liz Everett Krisberg, head of Bank of America Institute "There are several signs that rising costs of living are putting financial pressure on some younger consumers. Looking at Bank of America credit card data on households with a revolving balance, Millennials have seen the largest rise in their utilization rate. However, the good news is that their rates appear to have stabilized over the past year and a half." A shifting investing landscape Campbell Harvey, economist, Duke University "Passive investing has overtaken active investing and shows no sign of slowing down. There are risks to passive investing. Passive investing buys based on only one [criterion] — market capitalization. There is no price discovery. Passive investing does not care if the stock is under- or overvalued. Further, because all stocks are bought or purchased at the same time, this increases correlations, thereby reducing diversification benefits and, at the same time, increases systemic risk — in a crisis, all stocks are dumped at the same time." Read more here. Todd Sohn, technical strategist, Strategas "Defensive sectors are disappearing within the S&P 500 as it becomes more dominated by Tech. Heck, Nvidia is almost the size of Healthcare now! So, investors need to think differently about how to defend and diversify a portfolio at this stage, given the overexposure to large-cap Growth. That's still the core and key player in almost any portfolio, but perhaps look outside the equity box for strategies that can be a shock absorber in volatile environments." Daniel Morris, chief market strategist, BNP Paribas Asset Management "Most investors are aware of the dominance of technology shares in the US equity market. This phenomenon began in the 1990s with the arrival of the internet, received a big boost during COVID lockdowns, and has accelerated further with the onset of AI. Tariffs provide another reason for the sector to dominate. While tariffs may not help the sector, they hurt it less than others in the market due to the higher share of services revenue versus goods. "Investors may not be aware, however, of how dominant technology has been in emerging markets. Since 2008, emerging market technology stocks have outperformed the rest of emerging markets by nearly 500%, compared to a 350% outperformance of the Nasdaq 100 index versus the Russell Value. For the rest of developed market equities (primarily Europe and Japan), technology has underperformed. This is not to suggest these indices have not risen, but just that the factors driving the performance are different." Gabriela Santos, chief strategist for the Americas, JPMorgan Asset Management "This chart shows how this year's outperformance of 1,200bps by international stocks may have caught some investors by surprise — but it's a long time coming and just the start. It's a combination of 'push and pull': expensive U.S. valuations pushing investors to diversify and a pull from the rest of the world due to less earnings dispersion. Earnings in the Eurozone, Japan, and pockets of EM have been keeping up with or beating U.S. earnings this cycle, powered by the end of deflation and negative interest rates, a new focus on shareholder returns, and now further turbocharged by fiscal spending. It's not about a global rotation due to the 'end of U.S. exceptionalism' altogether — it's about a 'normalization of U.S. exceptionalism' from near record valuations and weights in portfolios.' Steve Sosnick, chief strategist, Interactive Brokers "While the S&P 500 has put in a nice performance since each of those dates, it has, of course, lagged the tech-heavy Nasdaq. But it has also underperformed other global indices. Among major indices, the DAX and Hang Seng have been the biggest winners, while the FTSE and STOXX 50 have generally kept pace with the SPX. Considering that the dollar has fallen against the Euro and Pound, that improves the relative returns of European markets for US-based investors. While past performance is no guarantee of future results — of course — the recent performance of various non-US markets should remind investors that there are plenty of opportunities outside our borders." Jay Jacobs, head of equity ETFs, BlackRock "Looking at the world through a thematic lens has become a more effective way of trying to digest what's happening and capture return opportunities than looking at it through a traditional sector lens. If you took a very traditional sector-based approach to the world since the beginning of the year, you might see geopolitical fragmentation and some economic uncertainty resulting in a consumer pullback, [so] that you would shift from consumer discretionary into consumer staples. And indeed, ... consumer staples have outperformed consumer discretionary, but it hasn't really fully explained what's going on because one of the challenges is that consumer staples [has] a highly globally integrated supply chain. So if you're concerned about supply chains or tariff risk or other disruptions, consumer staples doesn't offer that much protection." Kathy Jones, chief fixed income strategist, Charles Schwab "This chart shows ten-year Treasury yields and the broad-based Bloomberg Dollar Index. We are watching the divergence in trend between yields and the dollar. Typically, trends in interest rates and the dollar are correlated with high and/or rising yields, leading to dollar strength. However, since April, when the U.S. tariff policy was announced, the dollar has fallen sharply while yields have trended sideways. It suggests that global investors are expressing concerns about U.S. policy by moving out of dollars and/or anticipate policies to weaken the dollar. It could be a structural change that means U.S. yields will remain higher for longer than anticipated, even if the Federal Reserve cuts interest rates this fall. Foreign investors may be more cautious about holding dollar-denominated assets in the current environment. If that continues, it would have a significant impact on the cost of financing the deficit, inflation, and interest rates." Robert Sockin, global economist, Citi "Fiscal performance is challenged in many countries around the world. Countries including the United States, United Kingdom, France, Japan, India, China, and Brazil are expected to run large fiscal deficits even though their debt levels are already high. Italy, Spain, and Canada, meanwhile, are expected to run somewhat more modest deficits, although their debt levels remain elevated. "There is no clearly defined limit for how high debt can go that can be identified in advance. The US and many other indebted countries successfully issue significant quantities of government securities. Still, while markets have shown patience with high levels of indebtedness, we judge that this patience has limits. We saw one example of this in the UK during the fall of 2022 when proposed tax cuts set off a crisis of market confidence. "It strikes us as imprudent to experiment with the limits of market patience, but governments in several major countries nevertheless seem inclined to do exactly that." This project would not be possible without the work of Yahoo Finance Senior Editor Brent Sanchez, who turned Wall Street jargon into a digestible visual presentation of the current market moment. And a special thanks to Yahoo Finance's team of editors who worked on this project, including Myles Udland, David Foster, Nina Moothedath, Adriana Belmonte, Grace O'Donnell, and Brett LoGiurato. Most of all, thank you to all of the experts who contributed their time and thought to this project and helped make this Chartbook such a valuable snapshot in economic time. Josh Schafer is a senior markets reporter for Yahoo Finance. Follow him on X @_joshschafer. Have thoughts on volume five of the Yahoo Finance Chartbook or have a specific question about markets or the economy you'd like to see a Chartbook for? 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