Satya Nadella, chief executive officer of Microsoft Corp., speaks during a keynote session at the Microsoft Developers Build Conference in San Francisco, California, U.S., on Wednesday, April 29, 2015. David Paul Morris | Getty Images | Bloomberg

Two decades after it first peaked as the dominant leader of a dazzling bull market, Microsoft is once again Wall Street's indispensable stock. This is not simply about its performance or size, though it has soared to become a rare colossus. Microsoft's 70% gain in the past year has taken its market value to $1.4 trillion (neck-and-neck with Apple for the nation's biggest) and accounts for nearly one-eighth of the S&P 500's 23% rise over that time. In the past 12 months, Microsoft has added $600 billion in market capitalization — equivalent to the company's peak value in high-tech heyday of the late 1990s. Yet Microsoft's primacy and ubiquity in portfolios reflects the way it exemplifies nearly every characteristic that today's market is rewarding richly. Microsoft's rare versatility and rarefied virtues have transformed what was long a slow and staid name into something like the all-purpose core holding of this market moment.

Most obviously, software is the strongest secular-growth trend in this economy and the market. Beyond that, enormous companies with entrenched product platforms and durable cash flows riding long-lasting behavior shifts have become an anointed elite on Wall Street. The trillion-dollar market-cap club consists of these alone, with Alphabet and Amazon joining Microsoft and Apple, with Facebook and even the likes of Visa not too far behind.

Why 'MSFT' is working

You say you want to play the emerging cloud-services quasi-duopoly without having to worry about what it costs Amazon to ship a pair of flip-flops overnight? Microsoft is the stock for you. Interested in high-return businesses and generous distribution of cash through buybacks and dividends? Microsoft enjoys mid-30s percent profit margins, has repeatedly reloaded a $40 billion buyback plan and pays out more than $15 billion a year in dividends. Even after the stock's furious rise, it yields 1.1% and boosts the dividend every year; the current 51-cent quarterly payout is up more than 60% over the past five years. Love tech but are worried about disruptions related to China's coronavirus outbreak? Unlike Apple, Microsoft doesn't have dozens of stores in China, nor any of the important manufacturing centers semiconductor makers rely on. Perhaps this helps explain Microsoft's 8% surge for the week, taking its year-to-date gain to 16%. In an investment industry that carves up the market into thematic exchange-traded funds to reflect a wide set of tastes and tactics, Microsoft is over-represented versus its S&P 500 weight in ETFs pursuing the following categories: mega-cap growth, momentum, low-volatility, quality, dividend-growth and a raft of ESG portfolios. These funds screened for companies meeting environmental, social and governance standards have been intensely popular lately, and Microsoft is a top holding in a huge number of them.

Hedge funds love it

Goldman Sachs constructs and tracks a wide collection of baskets using S&P 500 stocks that reflect a theme or style or attribute. Microsoft is now the very top holding in its Hedge Fund VIP basket, meaning it is in the top ten holdings of the greatest number of hedge funds. The stock is also a component of the global defensive company, international-sales, consistent profitability and high-liquidity-stock groupings. Like several other mega-cap stocks, Microsoft is also in Goldman's clustering of stocks under-owned by traditional mutual funds. Active fund managers typically won't own a full portion of the largest index stocks, seeking to differentiate their results from a benchmark. Even this works to Microsoft's benefit, given current prevailing money-flow trends into passive index funds. Index fund inflows don't in themselves favor the largest companies; they buy every stock in the index in precise proportion to a stock's index weighting. But it does marginally help stocks that active managers own less of, as money is pulled from those managers and fed into indexes that buy a full helping of each stock.

Overvalued?

These multiple drivers of investor attention on Microsoft have lifted its valuation to an 18-year high. Its multiple to the next 12 months' forecast earnings now exceeds 30, its highest since early 2002, when the P/E was on its way down from a peak near 60 in late 1999. As the chart shows, it now builds in a hefty premium both to the S&P and the Nasdaq 100 (of which it represents around 10%).

Still, those earnings are almost all free cash flow, and in this market a dominant growth company valued at around a 3% forward free-cash-flow yield is pretty much the going rate. Given all the boxes Microsoft checks off for investors, it's no surprise the sell-side adores the stock. Of the 34 analysts covering Microsoft, 31 rate it a Buy and none a Sell.

'Masterpiece'