The S&P 500 has a long track record of success despite most individual stocks underperforming. In fact, according to a J.P. Morgan study, between 1980 and 2020, two-thirds of stocks in the Russell 3000 index, which consists of the 3,000 largest U.S.-traded companies, underperformed the S&P 500 during that span, while 40% had negative returns.
So what's the secret behind the S&P 500's success? One of the biggest factors behind its strong performance is that it is a market capitalization (market cap) index that lets its winners run. Ultimately, it is these megawinner growth companies that help power its returns.
Let's look at three S&P 500 companies with significant growth potential.
1. Palantir Technologies
Added to the S&P 500 last year, Palantir Technologies (PLTR -1.19%) has some of the best growth potential of any company. The data gathering and analytics company saw strong, accelerating revenue growth over the past year, and both the U.S. government and commercial customers embrace its Artificial Intelligence Platform (AIP).
While much of the focus on AI has been creating ever-better AI models, Palantir instead focused on the workflow and application software layers of AI to create an orchestration platform that can harness the power of AI models to help solve real-world problems. It does this by collecting data from disparate sources and structuring it into an "ontology" that then maps that data to real-world objects and processes. It has recently introduced AI agents within its platform that help automate decisions and drive action.
Its solutions are being embraced across industries, including hospital operators, pipeline companies, insurance companies, and telecom companies. The breadth of problems to which Palantir's solutions can be applied is absolutely massive, and why the stock has the potential to eventually become a huge winner. The biggest risk to the stock fulfilling its potential is its high valuation and any impact on its business from reduced government spending.
Image source: Getty Images.
2. Broadcom
Previously a sleepy chip and networking giant, Broadcom (AVGO 1.08%) has some huge growth potential. The company's hardware and software businesses could both see some strong growth over the coming years.
On the software side, Broadcom is looking to transform the business model of its recent acquisition, VMware. Since acquiring the virtualization and cloud computing solutions company in November 2023, it streamlined its operations and product solutions and began transitioning customers to a subscription model. The key for its software business moving forward is its VMware Cloud Foundation (VCF) platform, which lets customers manage workloads across public clouds and their own on-premise data centers. With enterprises starting to turn to AI hybrid solutions, Broadcom is nicely positioned to upsell its customers to VCF.
On the hardware side, Broadcom makes components for a variety of markets, but its biggest opportunities are in networking and ASICs (application-specific integrated circuits). On the networking side, its components, such as Ethernet switches and network interface cards (NICs), are vital in managing the flow of data and distributing AI workloads across servers to make sure resources are being used best.
However, it is the company's custom AI chip business that holds the most potential. Custom AI chips can outperform and use less power than mass-market graphics processing units (GPUs) for the specific tasks for which they are designed. Alphabet was its first customer, and its success has led to it winning additional customers.
Broadcom sees a $60 billion to $90 billion serviceable market opportunity in its fiscal year 2027 (ending October 2027) with its three furthest-along customers; however, it has added more, including Apple. This is a huge opportunity for a company that generated $51.6 billion in revenue in fiscal year 2024.
The biggest risk to the stock would be a slowdown in AI infrastructure spending.
3. Advanced Micro Devices
While a distant No. 2 player to Nvidia in the GPU market, Advanced Micro Devices (AMD 0.20%) has the potential to be another huge AI infrastructure winner. The company carved out a strong place in the data center market with its central processing units (CPUs), which act as the brain of a server, while GPUs provide the power. The market isn't as large as the GPU market, but it is still a big and growing one, and AMD has been taking market share.
However, its biggest opportunity could be with AI inference. While Nvidia's GPUs have been the preferred chips to help train AI models, AMD has been able to carve out a nice niche in the inference space. On its last earnings call, AMD boasted that one of the largest AI model companies was now using its GPUs to process a significant percentage of its daily inference traffic.
This is important because eventually, the AI inference market is expected to become much larger than the AI training market. With the company having established itself in this market and its GPUs much cheaper than those of Nvidia, it has a real opportunity to take some share in what could be a huge, growing market over the next few years.
The biggest risk to AMD's stock would also be a slowdown in AI infrastructure spending, as well as it always being an afterthought to Nvidia.
