These elite businesses will only get stronger in the age of AI.
The major market indexes have all hit new highs this year. But it's always a good idea to have a list of stocks you wouldn't hesitate to buy if they were suddenly on sale.
Historically, a market sell-off of 10% or more from the previous high occurs about once every two years. The Nasdaq Composite experienced a mild correction almost a year ago, so investors should be prepared for the possibility of another dip in the next year or so.
One indicator that continues to weigh on the near-term outlook for the markets is the inverted yield curve -- the yield on shorter-duration Treasury bonds is higher than the yield on longer-term Treasury bonds. That condition has preceded almost every recession over the last 50 years -- and the yield curve has been inverted since July 2022.
Market declines make a lot of investors nervous, but the longer you invest, the more you come to see these dips as opportunities to buy your favorite companies at lower valuations, setting the stage for better returns when the market recovers.
With that in mind, here are two quality stocks that investors shouldn't hesitate to buy in the next market sell-off.
1. Apple
Apple (AAPL -0.82%) is one of the most recognizable brands in the world. It has an installed base of 2.2 billion active devices. Combined with its cash-rich balance sheet and $101 billion in trailing free cash flow from sales of its products, it is an unstoppable business that would be worth buying on the dip.
The stock has surged to new highs this week as the company held its Worldwide Developers Conference, where it introduced Apple Intelligence -- a set of new artificial intelligence (AI) features coming to iOS 18 that could kick off a strong upgrade cycle for iPhones.
Slowing iPhone sales growth over the last year had the stock largely trading flat to lower through the first half of the year. The share price is currently up just 11% year to date and lagging the Nasdaq's 17% increase, but Apple's growth historically has come in spurts around the release of new devices with improvements to hardware and other features. Apple Intelligence could be an incentive for users with older devices to upgrade, since it will bring several conveniences to iPhone users, including the ability to summarize documents and the integration of OpenAI's ChatGPT into Siri.
While Apple Intelligence will be a free feature included in iOS 18, it will not run on older devices using previous-generation processors. It will require the A17 Pro chip found in the iPhone 15 Pro and iPhone 15 Pro Max. It will also run on iPads and Macs with the M1 chip and later versions. These AI capabilities require higher processing power, but offering them is also a great strategy for Apple to boost sales of its premium devices and grow its profits, which will benefit shareholders.
Apple stock trades at a premium forward price-to-earnings (P/E) ratio of around 31. If Apple sees strong demand for its newest devices when iOS 18 releases this fall, its revenue growth could accelerate, justifying that premium. Either way, Apple should be high on your shopping list in the next market sell-off.
2. Microsoft
Microsoft (MSFT 0.22%) transformed itself over the last decade from a company dependent on a slow-growing PC market into a fast-growing cloud services provider. It's not easy for large companies to change strategies amid shifting competitive landscapes, but Microsoft has shown the ability to adapt quickly to emerging opportunities -- a tell-tale sign of an unstoppable company.
The stock has been performing well of late, supported by solid growth across the business. Microsoft is well positioned to profit from the latest revolution in tech as it rolls out new AI-powered features across its consumer and enterprise products.
The company's software and subscription-based services generate massive amounts of high-margin revenue, which is helping it fund its heavy expenditures in cloud computing infrastructure to meet the growing demand for AI services. Microsoft's revenue grew 17% year over year last quarter, driven by balanced growth across Office software and enterprise cloud services.
Microsoft is monetizing AI across a range of products and services. It now offers AI features in Office apps, Windows, and the GitHub coding platform. Its Copilot AI assistant is now used by nearly 60% of the Fortune 500. Revenue from the productivity and business processes segment, which includes Office and Microsoft 365 subscriptions, grew at a healthy rate of 12% year over year last quarter.
Microsoft is cementing its lead in software and becoming the face of AI for millions of users who rely on its software every day. The stock is expensive at its current forward P/E of 36, but it would be well worth buying at a lower valuation during a market dip.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Microsoft. The Motley Fool has a disclosure policy.
