Why Stocks at All-Time Highs Can Still Be Long-Term Buys: A Value Investor's View

The question is a familiar one: can stocks at all-time highs still be long-term buys? For many, the psychological barrier is real. Paying a price that no one has ever paid before feels like a guaranteed recipe for regret. This line of thinking is linked to market timing, an almost impossible task. Yet the historical record suggests the barrier is more psychological than practical. Since 1950, the broad U.S. equity market has set 1,325 all-time highs. That's an average of over 17 every year. In other words, being at a peak is the norm, not the exception.

From a value perspective, the focus must shift from price levels to intrinsic value and the margin of safety. The market's current level is less important than the quality of the businesses within it and the price paid for that quality. The evidence shows that buying at an all-time high is not a losing strategy. A study covering the period from 1950 to 2025 found that if you had invested only at those high points, your returns over one-, three-, and five-year periods would have been close to the average return of the index. This includes some of the worst market crashes in history. The data suggests that new highs are often a sign of strength, driven by supportive economic and earnings trends that can last for years.

That said, a systemic risk has emerged that cannot be ignored: extreme market concentration. The dominance of the top ten companies, which now make up over a third of the market, represents a level of concentration not seen in more than a century. This creates a vulnerability where the entire market's fate is tied to a handful of names. Yet, for the disciplined investor, this does not negate the quality of the individual leaders. It simply means the investment thesis must be exceptionally clear for each of those dominant companies, focusing on their durable competitive advantages and long-term cash flow generation.

The bottom line is one of patience and perspective. All-time highs are not uncommon, and they have often been followed by further gains. The value investor's job is not to predict the next peak, but to assess whether the businesses at the peak are compounding capital at a high rate, with a margin of safety built into the price. In that light, the current level is less a warning sign and more a reminder to focus on the fundamentals.

Alphabet: The AI Moat and a Valuation That May Still Offer a Margin

Alphabet's recent ascent to a market cap of $4 trillion places it firmly in the category of companies that seem to command a premium simply for being Alphabet. Yet for the value investor, the question is not about the headline price, but about the durability of the competitive advantage and whether the market is pricing in its full potential. The company's response is a full-stack AI strategy that creates a formidable moat.

This approach is not a side project; it is a core business imperative. Alphabet designs its own chips, provides the underlying AI infrastructure, offers development platforms, and integrates consumer applications directly into its dominant products like Search and YouTube. This vertical integration ensures it is not reliant on external AI providers and creates multiple, interconnected sources of future revenue. The strength of this moat is backed by the company's financial engine. In the third quarter of 2025, Alphabet reported $102.3 billion in total revenue and generated $24.5 billion in free cash flow. That robust financial position funds the massive capital expenditures required for AI leadership without straining the balance sheet.

The market's current valuation for Alphabet is a point of interest. While the stock has rallied sharply, its price-to-earnings ratio of 33.65 as of January 15, 2026, is notably below its own five-year average of 50.4. This suggests the market may still be pricing in a more modest future than the company's trajectory could support. The core businesses are compounding at a high rate, with double-digit growth across Google Search, YouTube, and other platforms last quarter. More importantly, Google Cloud is scaling rapidly, with its revenue now at an annualized run rate of $60 billion. This growth, powered by AI, is the engine for future earnings expansion.

The bottom line is one of quality and potential re-rating. Alphabet possesses a wide moat, a powerful financial engine, and a clear path to sustained growth. Its current valuation, while not cheap, appears to offer a margin of safety relative to its historical multiples and its long-term potential. For the patient investor, the setup is not about buying at a low price, but about buying a durable champion at a price that still leaves room for error and for the market to eventually recognize the full value of its AI-led future.

Amazon: The Ecosystem Advantage and a Growth-Adjusted Price

Amazon's journey from online bookstore to trillion-dollar conglomerate is a masterclass in building a durable competitive moat. Its strength today is not just in its scale, but in the self-reinforcing ecosystem it has created. This ecosystem-spanning e-commerce, cloud computing, advertising, and now AI-acts as a powerful moat, making it difficult for rivals to gain a foothold. The company's $132 billion in annualized revenue from Amazon Web Services and its $71 billion in annualized advertising revenue demonstrate the breadth of this advantage. Each segment fuels the others: e-commerce drives data and demand for cloud services, while cloud profits fund the AI investments that enhance both e-commerce and advertising.

The company's aggressive investment in AI is the latest phase of this compounding strategy. AI is being deployed to improve customer experiences, like the Rufus shopping assistant used by 250 million customers, and to drive operational efficiency with over a million robots in fulfillment centers. This focus is paying off, with the online store's sales increasing 10% year-over-year last quarter. More importantly, it is accelerating the growth of its fastest-moving business, advertising, which grew 22% year-over-year. This AI-driven ecosystem is the engine for future earnings expansion, much like Alphabet's full-stack approach.

Financially, Amazon is in a position to fund this growth without constraint. The company generated $124 billion in net income in 2025, a figure that provides the capital to aggressively invest in AI and other initiatives. This robust profitability is the bedrock of its valuation. As of January 2026, Amazon trades at a P/E ratio of 33.65. While not a bargain, this multiple is notably below its own five-year average of 50.4. This gap suggests the market may still be discounting the long-term growth potential of its AI-powered ecosystem, pricing in a more modest future than the company's trajectory could support.

The bottom line is one of quality and a potential re-rating. Amazon possesses a wide, interconnected moat and a financial engine capable of funding its ambitions. Its current valuation, while reflecting its size, appears to offer a margin of safety relative to its historical multiples and its clear path to sustained growth. For the patient investor, the setup is not about buying at a low price, but about buying a dominant champion at a price that still leaves room for error and for the market to eventually recognize the full value of its AI-led future.

Risks, Catalysts, and the Long-Term Investor's Checklist

For the patient investor, the path forward is defined by a few critical catalysts and persistent risks. The primary catalyst for both Alphabet and Amazon is the successful, sustained monetization of AI across their core businesses. This is not a one-time event but a multi-year process of converting massive data and infrastructure advantages into higher-margin revenue streams. For Alphabet, the recent Apple–Gemini partnership is a powerful validation of its AI leadership and a near-term distribution win. For Amazon, the AI-driven enhancements to its $250 million Rufus shopping assistant and its 1 million fulfillment center robots are concrete steps toward higher sales conversions and lower costs. If these efforts translate into accelerated growth for their high-margin segments-Google Cloud and Amazon Web Services for the cloud, advertising for both-earnings power could expand for years.

Yet the investment thesis faces significant headwinds. The most prominent is regulatory overhang. Both companies operate in markets where antitrust scrutiny and potential new rules on data use or AI are constant possibilities. This creates a persistent uncertainty that can dampen sentiment and limit strategic flexibility. Competition is another key risk. In AI, they face rivals with deep pockets and innovative approaches. In cloud, the battle for market share with Microsoft and others is intense. While their scale provides a buffer, it does not eliminate the pressure to keep investing heavily to maintain lead. Finally, the broader market context is a risk in itself. The extreme concentration of the market in a few names means that any stumble by a leader like Alphabet or Amazon could trigger significant volatility, as the entire index's fate is tied to their performance.

From a value perspective, the practical framework for monitoring these companies is straightforward. The critical watchpoints are not quarterly beats, but the durability of their moats and the quality of their capital allocation. Investors should track whether growth in high-margin segments like AWS and advertising remains robust, as this signals pricing power and compounding ability. More importantly, they must assess the company's ability to convert its massive cash flows-Alphabet generated $24.5 billion in free cash flow last quarter, Amazon over $124 billion in net income last year-into shareholder returns. This includes disciplined capital allocation, a prudent balance sheet, and a clear strategy for returning excess capital.

The bottom line is one of patience and margin of safety. The catalysts are real and long-term, but they are not guaranteed. The risks are tangible and structural. For the value investor, the checklist is clear: monitor the execution of AI monetization, watch for regulatory developments, and ensure the companies continue to compound capital at a high rate. The current valuations, while not cheap, still reflect a future that is not fully priced in. The margin of safety lies in the quality of the business and the time horizon of the investor. If the moats hold and the capital allocation remains sound, the long-term compounding story can still unfold.