Wall Street is no longer blindly rewarding all artificial intelligence (AI) stocks. According to a recent Reuters poll, most economists now expect the Federal Reserve to keep the federal funds rate at 3.5% to 3.75% for the rest of 2026. With capital remaining expensive, investors need to focus on companies that can convert AI spending into durable revenue and profits.
Against this backdrop, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) stand out. Here’s why.
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Image source: Getty Images. 1. Alphabet
Alphabet is using its AI infrastructure base to strengthen multiple growth engines, including Search, Google Cloud, Tensor Processing Units (TPUs), Gemini models, and the Waymo autonomous-driving platform.
The clearest evidence of this strategy’s success is the Google Search business, which continues to grow despite fears of cannibalization from AI answer engines. In the first quarter of fiscal 2026, Google Search & other advertising revenue grew 19% year over year to $60.4 billion. Management said that search queries reached an all-time high. Additionally, AI-powered search features such as AI Overviews and AI Mode helped boost overall user engagement.
Google Cloud is emerging as a key growth catalyst. Google Cloud revenue jumped 63% year over year to $20 billion, while backlog nearly doubled sequentially to reach $462 billion. Management expects to recognize just over half of that backlog as revenue over the next two years. With 75% of Cloud customers already using Google’s AI products, AI is increasingly driving customer adoption, deal growth, and revenue visibility for the business.
Alphabet’s custom Tensor Processing Units (TPUs) are also proving to be a competitive advantage. The company reduced Gemini serving costs by 78% in 2025, highlighting its ability to lower the cost of delivering AI at scale. Waymo also surpassed 500,000 fully autonomous rides per week at the end of the first quarter. Hence, autonomous driving has now become a more visible part of Alphabet’s long-term value story.
That makes Alphabet one of the rare AI winners with both near-term monetization and long-term opportunity.
2. Microsoft
Microsoft is selling cloud capacity for AI workloads and embedding AI directly into the daily software stack of large enterprises.
Story Continues
Its AI business exited the third quarter of fiscal 2026 (ended March 31) with an annual revenue run rate of $37 billion, up 123% year over year. Microsoft Cloud revenue reached $54.5 billion, while Azure and other cloud services revenue grew 40% year over year in the third quarter. The company’s remaining performance obligation (RPO, a measure of backlog) also rose 99% year over year to $627 billion. Hence, the company has impressive revenue visibility.
Copilot is also emerging as a major growth engine. Microsoft 365 Copilot paid seats crossed 20 million in the third quarter, with seat additions up 250% year over year. With weekly Copilot engagement on par with Microsoft Outlook, Copilot is becoming a regular part of the enterprise software stack.
Microsoft is also focusing on shifting monetization from a per-user software model to a per-user and usage model across productivity, coding, and security applications. The company is also making its most-used Copilot models more efficient at handling AI workloads.
The combination of robust cloud demand, improving Copilot adoption, a shift to usage-based monetization, and increasing cost efficiency makes Microsoft one of the strongest AI stocks to own now.
Should you buy stock in Alphabet right now?
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Manali Pradhan, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.
2 Best AI Stocks to Buy Now as the Market Looks for Real Growth was originally published by The Motley Fool