Despite the hype surrounding artificial intelligence (AI) and the "Magnificent Seven" in 2025, only two stocks in the elite group actually outperformed the broader benchmark S&P 500 index, which gained nearly 16.4% last year, marking a third consecutive year of strong returns. That may leave some investors wondering if the group really did have a down year and could be poised for a bounce, or if perhaps it's the beginning of a broader pullback.
The two stocks that outperformed the S&P 500 crushed the market, with gains that at least doubled the market's performance. In fact, one Magnificent Seven stock was not far off from quadrupling the market's performance. Should you buy the two S&P 500 outperformers in 2026?
Alphabet: From value to outperformer
If there was a value stock in the Magnificent Seven heading into 2025, it was definitely Alphabet (GOOG +1.14%)(GOOGL +1.00%). The company faced several headwinds, including a U.S. Department of Justice lawsuit and threats from artificial intelligence (AI) chatbots like ChatGPT.
Image source: Alphabet.
In 2024, a federal judge ruled in favor of the DOJ, which had sued Google for employing monopolistic practices in the digital advertising industry that gave Google immense pricing power and made it prohibitive for other web publishers to compete with the search giant. Google at times has controlled over 90% of the traditional search market.
The DOJ requested that Google be required to divest its Chrome browser, a critical component of the company's search business, which makes up over half of Alphabet's revenue. Google also faced threats from AI because many believed that chatbots like OpenAI's ChatGPT, the fastest growing consumer app in history, would simply steal traffic from Google because it is better at answering search queries.
NASDAQ: GOOG
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Ironically, a federal judge ruled Google would not have to divest Chrome because the company faces new threats from AI that could erode its market position. The judge also ruled that Alphabet could continue to pay Apple tens of billions of dollars per year to make Google Safari the default search engine. This removed a key regulatory risk from Alphabet.
Additionally, Google appears to have demonstrated that its Gemini AI model can compete with ChatGPT. The market became more impressed with Google's AI summary overviews, new AI Mode, and updated Gemini models, leading investors to believe that Google can compete with new AI companies and maintain its dominance in at least the traditional search market. The stock blasted nearly 65% higher last year, nearly quadrupling the broader market's performance.
Trading at 29 times forward earnings, I do think investors can continue to buy Alphabet. While risks from competitors remain, the nice thing about the company is that it operates many strong businesses, including YouTube, Waymo, and Google Cloud, so it's not a total bet on AI.
Nvidia: Will the chip giant continue its dominance, or is competition inevitable?
Like most in the Magnificent Seven, Nvidia (NVDA +0.04%) endured an up-and-down year. Geopolitical concerns affected the chipmaker, as the Trump administration sought to prevent the company from selling certain chips to China. However, Nvidia's CEO, Jensen Huang, spent time lobbying the administration, and it appears that the company may be able to reopen its China business at some point in the near future.
In the second half of last year, many investors became concerned that Nvidia could struggle to maintain its dominance, as hyperscalers sought to build their own chips in-house and custom chips gained more traction.
NASDAQ: NVDA
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For instance, Google unveiled the seventh generation of its Tensor Processing Units (TPUs), which some experts see as a strong alternative to Google's more general-purpose graphics processing units (GPUs). TPUs are believed to be superior when it comes to training the large language models on more specific tasks.
However, Nvidia has continued to report strong quarterly earnings, growing revenue 62% year over year in its most recent report in December. The company also continues to innovate quickly on its chip designs. The company recently unveiled its Rubin platform, featuring six new chip designs that the company believes will accelerate agentic AI, such as autonomous driving.
While the reopening of China could significantly improve revenue and earnings for the company this year, I remain neutral on Nvidia, with the stock trading at close to 40 times earnings. I'm sure the company will continue to be at the center of the AI revolution for decades to come, but I'm curious to see how competition impacts the company's control of the chip market this year, and its margins.
