The S&P 500 index recorded impressive gains of 20% so far in 2024 to hit a level of around 5,740 points as of this writing, and the good news is that certain Wall Street analysts believe that the index could end the year on a stronger note.
Financial research and advisory firm DataTrek Research expects the index to hit the 6,000 mark soon thanks to the Federal Reserve's rate cuts and the strength of the U.S. economy. Meanwhile, BMO Capital Markets recently increased its year-end target for the S&P 500 index from 5,600 to 6,100. So, these estimates indicate that the index may rise another 5% to 6% by the end of 2024.
As such, now would be a good time for investors to buy shares of Nvidia (NASDAQ: NVDA) and Applied Materials (NASDAQ: AMAT) , two S&P 500 index components that enjoyed varying fortunes on the market so far this year. While shares of Nvidia jumped 150% in 2024, Applied Materials is up only 2% so far. The good news is that both companies are sitting on sizable end markets, which should allow one of them to sustain its stunning rally while helping the other step on the gas.
Let's look at the reasons why buying these two stocks could be a good idea before the S&P 500 heads higher.
Nvidia stock is built for more upside
Though shares of Nvidia witnessed some volatility over the past three months and are actually down 1.5% during the period as of this writing, the stock's median 12-month price target stands at $150. That would be a 21% increase from current levels, while the Street-high price target of $200 suggests that Nvidia stock could rise 61% from where it is right now.
The positivity in the broader market could help Nvidia break out of the volatility it has seen of late, especially because the company's phenomenal growth is here to stay thanks to the robust demand for chips required to train and deploy artificial intelligence (AI) models. According to one estimate, the AI chip market could generate $123 billion in revenue in 2024 and grow at an annual rate of 20% to hit a size of $311 billion in 2029.
Nvidia's data center revenue in the first six months of fiscal 2025 (which ended on July 28) stands at nearly $49 billion. At this rate, Nvidia's data center revenue in the current fiscal year (which coincides with 11 months of calendar year 2024) could hit $98 billion. That means Nvidia could end up controlling 80% of the AI chip market this year based on the overall market's projected size of $123 billion.
Assuming the company's share of this market drops in the long run to let's say 60%, it could still deliver $186 billion in data center revenue after five years (based on the $311 billion revenue estimate for 2029). At the same time, there are other solid growth drivers that Nvidia is sitting on that could contribute substantially to its growth over the next five years.
A closer look at Nvidia's business segments will tell us that the company is witnessing healthy growth everywhere. Its gaming revenue was up 16% year over year in fiscal Q2, while professional visualization and automotive also posted healthy growth rates of 20% and 37%, respectively. Of course, these businesses are small when compared to the data center segment, which produced 87% of Nvidia's total revenue last quarter and grew 154% year over year, but they have the potential to become big movers for the company in the long run.
For instance, Nvidia's professional visualization business could be at the beginning of a terrific growth curve thanks to the growing adoption of the company's digital twin solutions that are already being used by several enterprises such as Foxconn and Mercedes-Benz. More importantly, Nvidia is harnessing the power of AI to help developers build more accurate digital twins, which are virtual models of real-life objects or processes.
The digital twin market is currently in its early phases of growth and could end 2024 with $12.8 billion in revenue. But by 2035, the annual revenue of the digital twin market could hit $240 billion, according to Roots Analysis. Nvidia investors, therefore, would do well to focus on the fact that there are catalysts beyond AI that could help the chipmaker remain a top stock in the long run.
With shares of Nvidia trading at 41 times forward earnings right now, a discount to the U.S. technology sector's average earnings multiple of 45, investors are getting a good deal on this stock right now before a potential rally in the S&P 500 makes it more expensive.
Applied Materials' turnaround could help it deliver stronger gains
Though Applied Materials' stock are just treading water so far this year, the company's improving growth profile suggests that it could do better going forward. The company, which sells semiconductor manufacturing equipment, released its fiscal 2024 third-quarter results (for the three months ended July 28) last month. Its results exceeded consensus estimates, and the company also raised its full-year guidance.
Applied Materials' quarterly revenue increased 5% year over year to $6.78 billion, while earnings were up 12% to $2.12 per share. Analysts would have settled for $2.03 per share in earnings on revenue of $6.68 billion. The company expects to earn $2.18 per share in the current quarter on revenue of $6.93 billion, which is again higher than the consensus expectations of $2.14 per share in earnings and $6.92 billion in revenue.
For the full year, analysts are expecting Applied Materials to deliver revenue of just over $27 billion and earnings of $8.52 per share. The top-line forecast points toward a small increase over fiscal 2023 revenue of $26.5 billion, while earnings are expected to increase by 6% from last year's level of $8.05 per share.
The good part is that Applied Materials' revenue and earnings are expected to grow at stronger rates over the next couple of fiscal years.
AMAT Revenue Estimates for Next Fiscal Year data by YCharts
More specifically, its bottom line is forecast to grow at healthy double-digit rates. That won't be surprising as the increase in semiconductor capital equipment spending is going to be a tailwind for the company. Market research firm Gartner estimates that semiconductor capital equipment spending was down 10% last year, while 2024 spending is set to be relatively flat when compared to 2023.
However, in 2025, semiconductor capital spending is forecast to increase by 6.6% thanks to investments in AI chip capacity, as well as a turnaround in the smartphone and personal computer (PC) markets. For instance, Applied Materials' business is getting a shot in the arm thanks to the rapidly growing demand for high-bandwidth memory (HBM) chips that are deployed in AI data center accelerators. The company's HBM-related revenue could jump sixfold this year, and it could sustain its healthy growth in the long run because of the secular growth opportunity in this market .
So, the improvement in Applied Materials' growth rate could be rewarded with more upside on the market. It has a median price target of $240 according to 36 analysts covering the stock, pointing toward 22% gains from current levels. However, Applied Materials could do better than that thanks to sustained double-digit earnings growth over the next couple of years.
That's why investors should consider buying this stock right away as it is trading at just 22 times earnings -- a big discount to the technology sector's average as seen earlier. The S&P 500 index's move higher could send Applied Materials on a bull run.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials and Nvidia. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy .
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