The S&P500 (SNPINDEX: ^GSPC) is up 28% this year, which is close triple the average annual gain dates back to 1957. It follows an incredibly strong year in 2023, when the index rose 26%.
These gains have driven the S&P to a relatively expensive valuation. It trades at a price-to-earnings (P/E) ratio of 27.8, which is a large premium to its long-term average of 18.1. That makes it very difficult to find value in this market.
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Technology stocks are currently leading the S&P higher, but artificial intelligence (AI) stocks are generating particularly strong gains. This trend is likely to continue into 2025 as some of the world’s largest tech companies spend record amounts of money building AI infrastructure.
Although AI stocks are currently among the most expensive in the entire market, several of them still have the potential to beat the S&P 500 in 2025.
Image source: Getty Images.
There is still some value in big tech
Last year, a Wall Street analyst used the term “Magnificent Seven” to describe a group of big tech stocks that led the market higher. The group includes Nvidia, Microsoft, Apple, Amazon, Tesla, Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL)And Metaplatforms (NASDAQ: META).
Each of them is involved in the AI race in some capacity. However, in terms of value, Alphabet and Meta platforms stand out due to their relatively cheap price-to-earnings ratios:
PE ratio data according to YCharts
This is why both Alphabet and Meta have the potential to beat the S&P 500 by 2025.
The case for Alphabet
Alphabet is the parent company of Google, YouTube, self-driving car company Waymo and more. The conglomerate built its own family of large language models (LLMs), called Gemini, which are the basis of an AI chatbot of the same name. But the models also support several new AI features within Google Search.
The majority of Alphabet’s revenue comes from the advertising dollars generated by Google Search. It is the world’s largest Internet search engine with a 90% market share, but its dominance is threatened by third-party AI chatbots, such as OpenAI’s ChatGPT, that are changing the way people access information online.
The Gemini chatbot is one way Alphabet is addressing these threats, but the company understands it also needs to change the user experience on Google Search. Earlier this year it launched AI Overviews, which are AI-generated responses that appear at the top of traditional Google search results. Overviews may contain text, images, and links to third-party websites to give users quicker access to information. The feature is currently being rolled out to 100 countries, where it will serve 1 billion users per month.
Links within Overviews receive more clicks than the same links in traditional search results, so the feature could become a major revenue generator for Alphabet. Monetization will likely be a focus in 2025 as investors look for a reward for the tens of billions of dollars that companies like Alphabet have spent to date developing AI.
There’s one dark cloud hanging over Alphabet, and that’s the main reason the stock is so cheap compared to the rest of the Magnificent Seven. The U.S. Department of Justice (DOJ) won a major lawsuit this year, finding that the company engaged in monopolistic practices to protect its dominance in the Internet search industry.
The judge won’t impose Alphabet’s sentence until mid-2025, but the DOJ wants the company to sell its Chrome Internet browser and perhaps even its Android operating system to eliminate some of the distribution channels it uses to steal Google Search’s market share to keep. . These measures would certainly harm Alphabet, but on the other hand, it is also possible that the company would be imposed a simple fine instead.
Many technology analysts predict that this case will remain in court for years as Alphabet works through the appeals process. As a result, it will be business as usual for now, so investors may be better off focusing on the company’s AI efforts.
Wall Street’s consensus forecasts (provided by Yahoo) suggest that Alphabet will generate record high revenues and profits by 2025. I’m not suggesting the share price will rise enough to trade in line with the Magnificent Seven’s average price-to-earnings ratio (which is 50.4). But even if it corresponds to the price-earnings ratio of 34.9 of the Nasdaq-100 technology index, implying a 38% increase from here, which would almost certainly be enough to beat the S&P 500 in 2025.
The case for metaplatforms
Shares of Meta Platforms are up nearly 80% this year, and yet that’s true still cheaper than most Magnificent Seven shares. I think it will continue its momentum into 2025 for a number of reasons, but these mainly have to do with the company’s efforts in AI.
The content feeds within Meta’s social networks Facebook and Instagram are increasingly powered by AI. People will typically spend more time on these platforms if Meta can show them more posts they like, meaning they see more ads and generate more revenue for the company. During the third quarter of 2024 (ending September 30), CEO Mark Zuckerberg said that AI-powered recommendations led to an 8% increase in the amount of time users spend on Facebook this year and a 6% increase for Instagram.
Meta also launched an assistant last year called Meta AI, and it’s now available across all the company’s apps. It can answer complex questions, generate images, provide ideas for fun activities with your friends, and even settle debates in your group chat. It already has over 500 million monthly active users, and while it is free to use, there will be opportunities to monetize it in the future. For example, companies can pay money to place a product link in Meta AI’s answer to a relevant question.
Meta AI is powered by Llama, a family of LLMs that Meta developed in-house. Llama is open source, so millions of developers regularly dig through the code, allowing Meta to quickly identify bugs and make improvements faster. To date, Llama has been downloaded more than 600 million times, making it the most popular family of open-source LLMs in the world.
Meta plans to launch Llama 4 next year, which Zuckerberg hopes will be the most powerful in the industry. The company is on track to spend up to $40 billion this year on AI data center infrastructure to build enough computing capacity to bring Llama 4 to life. Simply put, bigger LLMs lead to smarter AI software, so Meta hopes its investments will pay off in the long run by creating new opportunities to generate revenue through features like Meta AI.
Despite Meta stock’s surge this year, it would need to rise another 19.5% for its current price-to-earnings ratio of 29.2 to match the Nasdaq-100’s 34.9 price-to-earnings ratio. Wall Street also thinks Meta will grow its earnings per share by 12% through 2025, which could pave the way for even more price gains for its stock. With all that in mind, I think it’s a great candidate to beat the S&P 500 next year.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
