Volatility is back.
Investors began August falling off a cliff due to a combination of weak economic data, including higher unemployment and the unwinding of the carry trade when the Bank of Japan raised interest rates on the yen. Concerns that the AI boom could be fading also weighed on tech stocks.
The S&P 500 lost 6% in the first three sessions, while the Nasdaq Composite gave up 8%. However, both indexes rapidly recovered their losses as better economic data came in, and strong earnings reports from bellwethers like Walmart helped reassure investors. As of Aug. 16, the S&P 500 and Nasdaq are both up slightly for the month now.
However, the risk of another pullback remains, especially as the labor market continues to weaken. The upcoming election adds another layer of uncertainty to the stock market.
If you're looking for stocks that could ride out any future volatility, here are two AI stocks that can deliver even in a rocky market.
Image source: Getty Images.
1. TSMC
Taiwan Semiconductor Manufacturing Corporation (TSM 0.60%) is the world's biggest contract chip manufacturer. That has become an increasingly vital position in the global economy, as TSMC handles chip manufacturing for companies like Apple, Nvidia, Broadcom, and AMD. Even Intel, which owns its own foundry, counts on Taiwan Semi to manufacture some of its advanced chips since Intel can't do it by itself.
Taiwan Semi now has a market cap of $1 trillion, a testament to how important it is in the global economy and the strength of its competitive advantage. You can see evidence of its competitive advantage in its operating margin, which reached 42% in the second quarter as the company benefited from close relationships with its customers and advanced technology. This means that no other chip manufacturer can match TSMC in advanced chip production at scale.
The semiconductor industry is cyclical, and TSMC is vulnerable to fluctuations in demand, but that's a much different position than that of a chipmaker like Nvidia, which is competing directly with other chipmakers. TSMC stock could pull back, but it would almost certainly recover as the need for its services isn't going away.
On top of that, the stock is reasonably priced at a price-to-earnings ratio of 31 and is growing fast, reporting revenue growth of 45% in July. Based on that price and growth rate, the stock should weather any volatility that the market throws at it.
2. Microsoft
Another rock-solid AI stock worth owning is Microsoft (MSFT -1.32%). The tech giant has emerged as one of the leaders in the AI boom thanks to its close partnership with OpenAI, the ChatGPT creator, in which Microsoft has invested an estimated $13 billion.
That partnership has made Microsoft an early winner in AI as programs like Azure OpenAI have driven growth in its cloud infrastructure business, and its AI Copilot is bringing in more revenue for popular software like its Microsoft Office suite.
Microsoft's vast reach in enterprise software is unmatched, stretching from productivity with Office, collaboration with Teams, enterprise resource planning with Dynamics, cybersecurity with Defender, and more. This means the company has a number of ways to benefit from AI, and it has multiple revenue streams it can count on.
In fact, Microsoft is more diversified than any of its "Magnificent Seven" peers, as it also counts on businesses like video games through Xbox and Activision Blizzard and its Windows operating systems, which still dominate the PC market.
Microsoft enjoys strong competitive advantages because once you use one of its software products, it makes sense to use others, and tools like Office are considered essential in most enterprises.
Like TSMC, Microsoft also operates in a cyclical business, but its investments in AI should continue to pay off, and its presence as a mainstay in enterprise technology is unlikely to change.
Microsoft is still trading down more than 10% from its peak, and it's well positioned to ride out any rough times on the market. It's a good stock to buy on a further pullback.
