Prediction: Despite Its Recent Pullback, Broadcom Will Beat the S&P 500 for the Third Consecutive Year

Broadcom (NASDAQ: AVGO) has been one of the market's great winners, and I think it has another year in the tank.

Here is my prediction: Despite a sharp pullback this summer, Broadcom will beat the S&P 500 (SNPINDEX: ^GSPC) for the third year in a row. It crushed the index in 2024 with a total return north of 110%, followed that with roughly 51% in 2025, and I expect it to finish ahead of the market again in 2026.

Image source: Getty Images.

First, the bad news that scared investors: In June, Broadcom fell about 15% after its quarterly report. The results were actually excellent, with record revenue and AI chip sales up 143% from a year earlier, but its guidance for AI revenue came in just shy of Wall Street's expectations.

More unsettling, management acknowledged that Alphabet, a major customer, is diversifying its sources of custom chips. When a stock is priced for perfection, even small blemishes get punished, and that is what happened here to Broadcom.

Why I think it beats the market anyway

Look past the one-quarter wobble, and the growth story is intact. Broadcom designs the custom AI chips that giants like Alphabet and Meta Platforms use to build their own systems, and it dominates the networking gear that ties those chips together. Management has pointed toward a path to more than $100 billion in annual AI revenue, and its large software business adds steady, high-margin ballast that pure chipmakers lack.

Even after the June drop, the stock has returned roughly 36% over the past year, comfortably ahead of the S&P 500's low-20s gain. As long as the AI infrastructure build-out keeps expanding, and every signal says it will for years, Broadcom sits in the sweet spot.

A risk to my prediction

I will be honest about what could sink this call. Broadcom trades at a premium that leaves little room for disappointment, and the news that Alphabet is spreading its chip orders around is a genuine warning that Broadcom's biggest customers could eventually do more in-house. If AI spending cools or a key client pulls back, the stock could stumble and trail the index. A prediction with a deadline is always humbling.

My read is that the June pullback is an opportunity, not a signal to flee. Broadcom's combination of booming AI chips, dominant networking, and a cushioning software arm gives it the fundamentals to extend its market-beating streak to a third straight year. I could be wrong if the AI trade cools, so size the position for volatility, but I would not bet against this business just because it had one bumpy quarter.

Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Broadcom, and Meta Platforms. The Motley Fool has a disclosure policy.