Sorry, Stock Market Bears: Alphabet Just Showed Why This Top Index Fund Is Still a Buy
Alphabet crushed estimates, showing that “Magnificent Seven” stocks are still thriving.
Alphabet (GOOG -0.02%) (GOOGL 0.10%) officially kicked off big tech earnings on Tuesday, and the Google parent had a banner report to share.
Alphabet smashed estimates in the third quarter as overall revenue rose 15% to $88.3 billion, ahead of expectations at $86.3 billion and accelerating from the second quarter.
Growth was solid virtually across the board as Google advertising revenue, which is primarily made up of search, was up 10.4%, while its cloud business revenue rose 35% to $11.3 billion, and its profitability also jumped. Operating income at the cloud division increased from $266 million to $1.94 billion, up by more than seven times while delivering a margin approaching that of leading cloud infrastructure platforms like Microsoft Azure and Amazon Web Services.
Operating margin at its core Google Services also jumped. And as overall operating margin rose from 28% to 32%, earnings per share (EPS) surged from $1.55 to $2.12, well ahead of the consensus at $1.84. Alphabet also held its head count flat over the last year, helping to drive the margin expansion, and holding to an earlier promise to restrain the growth of its workforce.
Part of the gains in EPS owes to other income of $3.2 billion, most of which came from increases in its equity investments. However, even without that, operating income rose 33% in the quarter to $28.5 billion. That’s phenomenal growth for one of the biggest companies in the world, and one that some regard as mature.
As the biggest digital advertising platform in the world, Alphabet is also a bellwether for the global economy. So its report holds clues for where the stock market is headed. The company’s shares jumped 5% following the report, but here’s why it could trigger more gains in the broader market.
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What Alphabet’s report means to the stock market
Alphabet’s report comes at a time when there’s palpable nervousness about the strength of the bull market. Warren Buffett has spent 2024 selling equities and buying Treasuries, and Goldman Sachs just predicted that the stock market would grow only 3% annually over the next decade.
Other prominent investors have called out an AI bubble, and major indexes are expensive, according to historical standards.
However, Alphabet’s banger of a report is a reminder that the largest tech companies, often called the “Magnificent Seven,” are still growing at impressive rates.
It also shows that advertisers are still ramping up spending after a post-pandemic lull — a bullish sign for the global economy as well, since businesses spend on ads when they’re confident they’ll get a good return on their investment and consumers will buy their products.
Alphabet’s report also bodes well for Meta Platforms and Amazon, the No.2 and No.3 digital advertising businesses in the world, respectively.
The index fund to buy now
While Alphabet’s report is bullish for the stock itself, it’s also a buy signal for the tech-centric index fund Invesco QQQ Trust (QQQ 0.74%), the largest exchange-traded fund (ETF) that tracks the Nasdaq 100, which comprises the 100 largest Nasdaq-listed companies.
Alphabet’s report shows how many avenues for growth remain for companies valued in the trillions of dollars. Those include advertising, cloud computing, and AI, and those Magnificent Seven stocks make up close to 40% of the Nasdaq 100, showing they are guiding the ETF.
The Nasdaq 100 has a long track record of outperforming the S&P 500, thanks to the superior growth of the top tech stocks. The index has a compound annual growth rate of 18% over the last decade and looks poised to continue beating the broad-market index in the AI era.
Lastly, the Alphabet report is a strong indicator that peers like Microsoft, Amazon, and Meta, which all compete closely with the Google parent, are set to report smashing earnings results as well.
If that happens, it should propel the Nasdaq 100 to new heights through earnings season. The Invesco QQQ ETF remains the easiest way to capitalize on the growth of big tech in AI and beyond.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Goldman Sachs Group, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.