The S&P 500 index includes roughly 500 large-cap U.S. stocks and is often used as the key benchmark for measuring the broader stock market’s performance. Over the last five years, the benchmark index has delivered a total return of 109%. Over the last decade, it has produced a total return of 257%.
Investing in an exchange-traded fund (ETF) that tracks that S&P 500 index is a great, low-risk investing move, but there are also stocks that are part of the index that will go on to produce returns that crush the index’s average. With that in mind, read on to see why two Motley Fool contributors think that buying these S&P 500 growth stocks and holding for the next five years would be a great move.
Keith Noonan: With gains of roughly 22% this year, Amazon (NASDAQ: AMZN) stock has slightly underperformed the S&P 500 index’s total return of 23%. But there are good reasons to think that the tech giant will far outperform the benchmark index over the next half decade.
For starters, Amazon’s business continues to look quite strong. While the stock isn’t beating the S&P 500 in 2024’s trading as of this writing, the business has generally been serving up encouraging results.
Amazon’s revenue increased 10% year over year to reach $148 billion in the second quarter, and its operating income more than doubled year over year to $14.7 billion. Revenue for the company’s Amazon Web Services (AWS) cloud infrastructure business increased 19% year over year to reach $26.3 billion. Meanwhile, the company’s digital advertising business rose roughly 20% year over year to hit approximately $9.5 billion. The e-commerce-focused North American segment saw sales climb 9% to $90 billion, and the similarly structured international segment saw sales increase 7% to hit $31.7 billion.
Growth for the higher-margin AWS and digital-advertising units, along with margin improvements in e-commerce, have helped Amazon score strong profit growth this year. Its e-commerce business still delivers the majority of Amazon’s overall revenue, but there’s a good chance that cloud services and digital advertising will continue to account for a bigger portion of the overall sales picture. Increasing sales contributions from these higher-margin businesses should help push the company’s combined margins higher.
But it would be a mistake to underestimate the relatively slow-growing, lower-margin e-commerce business when it comes to assessing Amazon stock’s return potential over the next five years. While the potential for artificial intelligence (AI) to be a sales driver for AWS has already been baked into many forecasts, the potential for AI to have a transformative impact on the company’s online retail business still appears to be underappreciated.
