Market Trends and Stock Insights

The S&P 500 index has surged almost 80% over the past five years. Despite facing geopolitical tensions, rising inflation, and unpredictable monetary policies, stocks are still close to historic highs, with a price-to-earnings (P/E) ratio of 32x, which many might consider rather steep.

This leads many investors to ponder not if, but when a market correction might occur. If that happens, I wouldn’t rush to sell off my stocks. Instead, I’d look for opportunities to invest in solid companies that may have been slightly overvalued during the recent bull market. Personally, I wouldn’t hesitate to buy shares in Costco and Amazon.

Why Buy Costco?

Costco, known as the largest warehouse retailer globally, can maintain low prices because it derives most of its profit from membership fees. Its significant size enables it to negotiate better deals with suppliers, while additional services like gas stations and food courts help to attract savings-focused shoppers, particularly during economic downturns.

For Costco to continue thriving, it needs to boost net sales, open more locations, gain new members, and keep high renewal rates. From FY2020 to FY2025, the company saw sales and earnings per share grow at rates of 10.5% and 15.1%, respectively. By the end of that period, the number of warehouses increased from 795 to 914, while its member count rose from 105.5 million to 140.6 million, and renewal rates went from 88% to 90.5%.

In the first half of fiscal 2026, adjusted net sales (excluding fuel and foreign exchange) increased by 6.5%. The number of warehouse locations reached 924, and cardholders climbed to 147.2 million. However, the global renewal rate dipped to 89.7%, mainly attributed to a decrease in digitally signed members.

To counteract falling renewal rates, Costco is enhancing targeted digital communications and promoting additional services while trying to encourage members to opt into auto-renewal. Yet, it might take time for these strategies to pay off.

Still, analysts anticipate Costco’s revenue and EPS will grow at rates of 8% and 11% from FY2025 to FY2028. While I think these targets are quite achievable, the current stock price, trading at 50 times this year’s earnings, doesn’t seem cheap. If a market downturn reduces its valuation, I’ll be keen to buy shares in this well-managed company.

Why Buy Amazon?

Amazon leads as the largest e-commerce and cloud infrastructure firm with a substantial competitive advantage and a robust ecosystem. Its Prime service has captured over 240 million subscribers globally, offering them various discounts and digital perks. Furthermore, Amazon Web Services (AWS) holds almost a third of the cloud market.

Today’s changes

(-0.70%) $-1.89

Current price

$266.57

Key data points

Market capitalization

$2.9 trillion

Daily range

$266.36 – $269.77

52-week range

$196.00 – $278.56

Volume

1.2M

Average volume

45.2M

Gross profit

50.60%

A significant portion of Amazon’s earnings comes from its e-commerce sector, but the real profits flow in from its high-margin cloud and advertising businesses. This unique blend allows Amazon to use its lucrative cloud and advertising profits to support its e-commerce growth, even if that side sometimes incurs losses.

This advantage is significant, enabling Amazon to achieve revenue and EPS growth at CAGRs of 11% and 22%, respectively, from 2021 to 2025, despite economic challenges. Analysts project similar growth rates of 14% in revenue and 21% in EPS for the period from 2025 to 2028, as AWS benefits from the rise of AI and digital advertising continues to expand.

While this growth pattern is impressive, Amazon’s stock isn’t exactly a bargain; it stands at a P/E of 31. Thus, if a market downturn leads to a dip in its valuation, I may look to increase my holdings, even though it’s already the largest part of my portfolio.