Market indexes continue to trade close to new highs, but investors should be prepared for more volatility in 2025. Historically, the stock market experiences a correction, which is defined as a pullback of at least 10% from the recent high, once every two years. A short correction occurred in late summer of 2024, but there could be another one in 2025 given elevated valuations for leading stocks. The average price-to-earnings multiple for the S&P 500 is 30, which is well above the historical average.
It's always a good idea to have a list of outstanding companies that are worth buying at discounted valuations. Buying shares of strong companies when they are on sale is how great investors like Warren Buffett built tremendous wealth in the stock market. Here are two quality growth stocks that would be no-brainer buys during a market correction.
1. Amazon
Amazon (AMZN +0.48%) has created tremendous returns for investors over the last few decades. The company serves over 200 million Prime members in its online store, but the momentum in the cloud business is still a great reason to buy the stock on a sell-off in the near term.
NASDAQ: AMZN
Key Data Points
Amazon is a tech behemoth with $638 billion in annual revenue and growing. Management's efforts to lower costs helped the company nearly double its operating income to $68 billion last year. However, cloud services continue to look like the company's most valuable business over the long term.
Amazon Web Services (AWS) is the leader with a 30% share of a growing $330 billion cloud market. Companies continue to migrate their data systems from on-premise servers to the cloud to take advantage of artificial intelligence (AI). AWS offers several tools to help businesses build AI applications, including custom AI chips to provide better cost efficiency for working with AI services in the cloud.
Its competitive offering helped deliver another quarter of strong growth, with AWS revenue up 19% year-over-year in Q4. AWS made up close to half of Amazon's total operating profit in the quarter, which is why the stock should reward shareholders over the long term.
The stock trades at 36 times 2025 earnings estimates, which is fair but not a bargain. Investors can start a position today and still earn solid returns over the long term, considering Amazon is still optimizing costs and growing earnings at high rates. However, the stock would be undervalued at a discount from its current price-to-earnings multiple.
2. Alphabet (Google)
Alphabet's (GOOG 0.48%) (GOOGL 0.31%) valuable internet properties like Google and YouTube makes it another no-brainer growth stock to buy on a pullback. The stock hit a 52-week high of $208 earlier this year before falling following its fourth-quarter earnings results.
NASDAQ: GOOGL
Key Data Points
Google has a powerful position in digital advertising, which makes up most of the company's $350 billion in trailing revenue. Alphabet uses AI to deliver relevant ads in Search results, YouTube, Gmail, and other services. Google ads generated $72 billion in revenue last quarter, up 10% year over year.
The company's dominant position in online advertising is a good enough reason to buy the stock on its own, but Google Cloud is another growth catalyst starting to emerge. Revenue from cloud services grew 30% year over year in the fourth quarter to nearly $12 billion.
Google Cloud benefits from similar trends as Amazon. It offers custom AI chips and services that are meeting growing demand. Google's AI cloud solutions helped it double the number of first-time commitments last year. New major clients in the fourth quarter included Mercedes-Benz and Latin American e-commerce leader MercadoLibre. Synergy Research estimates that Google garnered 12% of the $330 billion cloud market in Q4, behind Amazon and Microsoft.
Google's cloud customers consume more than eight times the computing capacity compared to 18 months ago. This has required a substantial increase in spending on AI infrastructure to meet growing demand, but Alphabet is reaping the rewards. Operating income in cloud services jumped from $864 million in Q4 2023 to over $2 billion in Q4 2024.
The stock is attractive right now, trading at 21 times this year's consensus earnings estimate. Analysts expect Alphabet's earnings to grow at an annualized rate of 16% in the coming years, which provides a reasonable estimate of the returns you can expect. Indeed, the stock looks undervalued at these share prices, so any further dip in the near term would make the stock a steal.
