A massive once-in-a-lifetime catalyst is driving amazing stock returns and will likely continue to do so for many more years.
It’s been an impressive decade for stocks. The S&P 500 has returned 160% and an average of 15.6% per year in the 2020s. That’s about 50% higher than the market’s long-term average.
Not bad considering this decade has featured a global pandemic, the highest inflation in 40 years, and the highest interest rates in 20 years. The decade has also featured relatively modest GDP growth by historical standards.
There’s one reason for the superior stock returns – technology. Artificial intelligence (AI) is responsible for this market. Those stocks have driven the vast majority of the market’s gains. Without technology, market returns this decade would be below average.
Consider last year. The S&P returned around 18%. But, according to Statista, technology and communications sectors alone drove 63.1% of those returns. Without them, the S&P yearly return would have been around 6%. Since the current bull market began in 2022, AI and mega-cap tech stocks have accounted for roughly 75% of market index returns and 80% of earnings growth.
[text_ad]
But those stocks haven’t gone straight up. There have been several pullbacks and consolidations over the past few years. Those stocks pulled back in July, and information technology isn’t even the top-performing S&P stock sector year to date. In fact, six of the “Magnificent 7” stocks had underperformed the S&P so far this year as recently as last week.
As with any bull market, AI stocks have ups and downs. Investors have been concerned about valuations and the massive investment necessary to generate future revenue. Concerns are good. Consolidations are normal and healthy. They prevent bubbles. The AI bull market is also likely to change its stripes with new winners and losers.
Artificial intelligence stocks have stumbled lately, but things are changing. Momentum is shifting.
Microsoft (MSFT) soared 16% higher in one day after reporting last quarter’s earnings. Amazon (AMZN) had a
huge gain after earnings, too. After floundering in July, the AI trade is getting hot in spots. Investors are starting to discriminate between companies that can monetize huge investments quickly and those that can’t. In fact, technology ETF State Street Technology Select (XLK) is up 12% in just the past week.
The timing might be excellent to profit from this generational catalyst. AI is regaining upward momentum while several of the very best stocks are still selling well below the highs.
The following two companies have strong upside potential. But for very different reasons. Broadcom (AVGO) is generating massive revenue and earnings growth already. It’s a company that is monetizing huge profits already and has been dragged down by the sector. Oracle (ORCL) is the poster child for huge investments that won’t see the payoff for a while. But the company has gotten crushed, and it’s cheap with massive growth ahead.
Two AI Stocks Positioned for the Next Leg of the AI Trade
Broadcom Inc. (AVGO)
Few stocks have benefited from the artificial intelligence craze like AVGO has. Although the stock price closed July down more than 20% from the 52-week high, AVGO has still returned 842% over the last five years, compared to a return of 74% for the S&P 500 over the same period.And there are very good reasons to believe the stock still has significant upside from here.
Broadcom is a global technology infrastructure leader and an industry Goliath, with $75 billion in annual revenues. It’s an icon of the technology revolution with roots that trace back over 50 years, to the old AT&T/Bell Labs. The company has many category-leading products in semiconductors and infrastructure software solutions.
The company is an early comer to the technology party, providing crucial infrastructure that enables other technologies that come along the way. The company is so entrenched in the infrastructure of today’s technology that 90% of internet traffic uses Broadcom’s systems.
There is tremendous growth potential in Broadcom’s custom XPU chips.
Nvidia (NVDA) has been the undisputed king of chips that support AI functions. But the chips are expensive at $30,000 per chip. Companies use hundreds of these chips in their data centers and are looking for ways to curb some of their massive investments in AI infrastructure. Broadcom’s custom chips are cheaper. While XPU chips don’t have some of the bells and whistles that Nvidia’s chips have, they are tailored to accommodate a company’s specific needs. The market is starting to move more towards Broadcom’s chips.
The company beat expectations in the first quarter, with revenue growth of 48% and profit growth of 85%. But the stock price has fallen since. The problem was that Broadcom disappointed investors with guidance. The company forecast AI revenue of $56 billion for 2026 and over $100 billion for 2027. The market was supremely disappointed that guidance was not raised, so much so that it prompted a selloff in the rest of the technology sector as investors turned on the AI trade.
Let’s put that in perspective. Revenue for the whole company for 2025 was $64 billion. Just the AI part is expected to be well over $100 billion next year. Unlike some other early AI beneficiaries, the opportunity for Broadcom isn’t peaking. It’s broadening.
AVGO has been a hot stock and a primary AI beneficiary for the very best reason: soaring revenues and earnings. The AI trade is getting hot again.AVGO is in one of the strongest positions of all large AI stocks.
Oracle Corporation (ORCL)
Although this company likely has massive earnings growth ahead, the most compelling reason to buy it now is price. The stock has been clobbered. The price closed July down more than 60% from the 52-week high. The current average analyst’s price target is 80% above the current price.
ORCL is coming off a huge run of being out of favor. But it tends to be in favor sometimes too. For example, the price soared over 50% in less than two months this past spring. The price rocketed over 170% in the spring and summer of 2025. Anything is possible. The price could go down more after you buy it. It could take a while to move higher. But it seems quite reasonable to expect another strong upside move at some point.
The company is now best known for its relational database management system and for its cloud-based enterprise applications. The Cloud services part represents about three-quarters of the company’s revenue. But the company has recently turned the corner to become a major player in artificial intelligence.
Companies require cutting-edge computer power and services to streamline the business and compete effectively. But they don’t have the capital resources or expertise to build out a computer infrastructure nearly as extensive as Oracle’s. It makes sense to tap into Oracle’s services for a fee. That way, they can compete at the highest levels by utilizing technological systems they could never build themselves.
Such capabilities are about more than just acquiring an edge. They are a matter of survival in today’s environment. Oracle’s Database Management System (DBMS) is the most popular application currently on the market. Customers include Intel (INTC), Cisco Systems (CSCO), Zoom (ZM), and Intuit (INTU).
The emergence of artificial intelligence has dramatically increased the need for Oracle’s services. Among the cloud services, Oracle offers a service called Oracle Cloud Infrastructure (OCI). It allows customers to tap into its vast data center networks. OCL is the one that provides AI capabilities. Current customers include AI start-ups, including OpenAI, Cohere, and Elon Musk’s xAI.
The service is highly popular not only for what it provides but because it provides it faster and cheaper than the competition. Cloud revenue grew 47% last quarter, and growth is forecast to be 58% to 64% this quarter. The backlog of orders for the AI services is up to a whopping $638 billion. The company has orders for services that are almost ten times its current annual revenue.
The market seems to go back and forth about being excited about the massive growth ahead and being skeptical about the investment required and the hit to earnings before this revenue comes to fruition. The central story hasn’t changed since ORCL soared 50% in less than two months. But investors’ moods will swing around. I still think this stock can soar in the months and years ahead.
[author_ad]