Best AI Stocks to Buy Before the Next Market Rally: TSMC, Microsoft, or Alphabet?

Investors are watching closely for signs that the next stock-market rally may begin. Many analysts believe that artificial intelligence (AI) stocks could lead that upswing given rising demand for AI infrastructure.

In recent months, AI-related companies have fueled much of the overall market’s gains. According to Investopedia, most of the top performers in the the S&P 500 so far this year are directly tied to AI. The article argues that infrastructure spending, cloud contracts, and strong investor sentiment make AI likely to remain a major influence on market returns.

On the supply side, Taiwan Semiconductor Manufacturing Company (TSMC) has reported a sharp increase in revenue, driven by AI chip orders. In the first half of 2025, TSMC’s sales reached US$60.5 billion, marking a 40% year-on-year rise. That growth is attributed in large part to demand for AI processors.

Given the interplay between macro trends and company fundamentals, the central question becomes: which AI-exposed stock offers the best balance of upside and risk entering a potential market rally?

Why AI Stocks Matter in the Next Rally

Artificial intelligence has become one of the strongest drivers of corporate spending, making it a central factor in how the next market rally could unfold. Companies across industries are increasing investments in AI, not only in software applications but also in the hardware and cloud infrastructure that supports them. Global spending on AI systems is projected to reach $300 billion by 2027, according to IDC, highlighting how rapidly the market is expanding.

Chipmakers, cloud providers, and enterprise software companies are expected to benefit from this trend. Nvidia, for instance, continues to dominate in high-performance processors, while Microsoft has integrated AI across Azure and Office products, creating a steady demand cycle. Google has also advanced with its Gemini AI models, strengthening its position in search and cloud services.

Analysts point out that AI stocks tend to magnify market moves because they capture both growth optimism and investor speculation. This was visible during 2023 and 2024, when the bulk of S&P 500 gains came from companies with strong AI exposure. As noted by Techi.com, AI adoption is increasingly shaping how businesses compete, making these stocks not only cyclical bets but also long-term structural plays.

In this environment, AI stocks are positioned to be leading indicators when the broader market turns higher.

Evaluating Top Contenders

Three leading companies stand out among AI-stocks in terms of their current performance, growth potential, and risks. These are Taiwan Semiconductor Manufacturing Company (TSMC), Microsoft, and Alphabet (Google). Each has distinctive strengths and drawbacks.

TSMC (Taiwan Semiconductor Manufacturing Company)

TSMC posted second-quarter 2025 revenue of NT$933.80 billion (about US$31.9 billion), up 38.6% year-over-year, exceeding estimates. Net income rose roughly 60.7% compared to the same period last year. These gains are driven mainly by demand for AI- and high-performance computing-related chips, especially its advanced process technologies below 7 nanometers.

Also, advanced node technologies (3nm, 5nm, 7nm) now account for about 74% of its wafer revenue, with 3nm alone contributing about 24%. Risks include margin pressure from a strong local currency, rising costs from overseas production expansion, and potential trade or export restrictions. 

Microsoft

Microsoft’s fiscal fourth quarter (ended June 30, 2025) showed $76.4 billion in revenue, up 18% year-over-year, with operating income rising by 23%. Its cloud segment, which includes AI infrastructure, saw revenue of $46.7 billion, up about 27% year-over-year.

Strengths include a broad AI portfolio (cloud service, apps, tools), large scale, and continuous investment. Challenges involve stiff competition in cloud services, regulatory scrutiny, and the need to convert AI investments into profit (not just revenue growth).

Alphabet (Google / Alphabet Inc.)

In Q2 2025, Google Cloud revenue rose to $13.6 billion, growing about 32% year-over-year.
Search revenue also saw solid growth. Alphabet increased its capex forecast to $85 billion for the year, up from an earlier estimate of $75 billion, largely to expand its AI data centers, custom chips, and infrastructure. 

Risks include increasing spending which may put pressure on free cash flow, and strong competition from Microsoft, Amazon, and others in cloud and AI infrastructure.

Each contender has compelling strength. TSMC offers exposure to the hardware side where AI demand is very visible and accelerating. Microsoft and Alphabet each bring diversified exposure across software, cloud, and tools. Which one offers the best upside depends on risk tolerance and views about competition and regulation.

Spotlight Pick: TSMC

Among the leading AI-linked companies, Taiwan Semiconductor Manufacturing Company (TSMC) appears to be a standout candidate for investors looking ahead to the next market rally. The company occupies a unique position as the world’s largest contract chip manufacturer, supplying critical components to Nvidia, Apple, AMD, and other major technology players. This makes TSMC a central part of the AI supply chain rather than a direct competitor in the software or services market.

Recent financial results underline its importance. In the second quarter of 2025, TSMC reported revenue of NT$933.80 billion (around US$31.9 billion), a 38.6 percent increase year over year. Net income surged by more than 60 percent in the same period, far exceeding analyst expectations. Much of this growth was tied to orders for advanced chips below 7 nanometers, including the highly in-demand 3-nanometer processors that now contribute nearly a quarter of wafer revenue.

What makes TSMC particularly appealing is its indirect exposure to AI growth. Unlike Microsoft or Alphabet, which must continually prove that AI services can be monetized, TSMC benefits whenever those companies expand data center capacity or launch new AI models. The company’s revenues are tied to the broader ecosystem, which reduces dependence on a single product or platform.

However, risks remain. Geopolitical tensions around Taiwan, rising overseas manufacturing costs, and the cyclical nature of semiconductors are all factors to monitor. Even with these challenges, TSMC’s critical role in meeting global AI chip demand places it in a strong position to benefit as the market turns upward.

How to Position

For investors considering TSMC or other AI-linked stocks, portfolio positioning and risk management are key. Given the volatility of technology shares, analysts recommend keeping AI investments as a portion of a diversified portfolio rather than an outsized single bet. Entering positions gradually, rather than all at once, can also help reduce the risk of buying at a short-term peak.

Geopolitical tensions in East Asia, cyclical swings in semiconductor demand, and potential export controls are risks that must be monitored closely. Setting clear exit points, such as predefined stop-loss levels, can help limit downside exposure. Pairing TSMC with more diversified companies like Microsoft or Alphabet may balance risk between hardware suppliers and cloud or software leaders.

AI remains a fast-growing field, but careful position sizing, ongoing monitoring of earnings, and awareness of external risks will be essential for those seeking to benefit from the next rally.