History Says the Nasdaq Will Soar: 2 Artificial Intelligence (AI) Stocks to Buy Before 2026, According to Wall Street

The Nasdaq entered a new bull market on April 8 and has rallied about 53%, with historical bull markets averaging 281% since 1990. Nvidia posted stellar Q3 results with revenue up 62% to $57.0 billion and non‑GAAP net income of $1.30 per diluted share, underpinning analyst confidence (median price target $250, ~41% upside from $177) driven by dominant GPU and networking positions and the CUDA ecosystem. Zscaler beat fiscal Q1 guidance with revenue up 26% to $788 million and non‑GAAP EPS of $0.96, raised guidance modestly, reported AI security revenue growth of 80%, and carries a median analyst target of $330 (~31% upside from $251) despite a high ~72x adjusted earnings multiple and expected ~17% adjusted EPS CAGR to July 2028.

Analysis

Market structure: Nvidia (NVDA) and cloud-native security vendors like Zscaler (ZS) are clear winners — NVDA because GPUs + CUDA create a high switching-cost ecosystem (analyst mix 70–90% share in AI accelerators) and ZS because SSE scales signal-rich ML detection. Losers are legacy on‑prem appliance vendors and any silicon vendor without a mature software stack; GPU lead times and constrained foundry capacity imply pricing power for NVDA and elevated capex for hyperscalers over the next 12–36 months. Cross-asset: a sustained AI rally would favor equities and risk assets (downward pressure on core bond prices), bolster USD carry into EM, and keep semiconductor commodity demand (copper, specialty gases) elevated; equity options IV on NVDA/ZS will stay rich — prefer spreads to naked exposure.

Risk assessment: Tail risks include US/China export controls or sanctions that could cut NVDA China revenue >15–25% in a quarter, and a faster-than-expected shift to custom TPUs/software that erodes CUDA pricing power over 3–5 years. Near term (days/weeks) risks: earnings/guidance shocks and inventory corrections; medium/long term (quarters–years): hyperscaler in‑house builds, regulatory antitrust, and margin compression in security SaaS. Hidden dependencies: hyperscaler procurement cycles and channel inventory drive lumpy revenue; ZS’s advantage depends on continued high signal volume — an enterprise freeze in cloud migration would compress growth.

Trade implications: Direct: establish a 2–3% long core position in NVDA, scaling in on pullbacks >10% and hedge with 0.5% allocated to protective puts or put spreads; consider a defined-risk option structure such as Jan 2027 200/320 call spread to express the consensus ~41% upside while limiting premium. For ZS, use a smaller 1–1.5% long or buy Jan 2027 250C LEAPs funded by selling near-term calls; pair trade: long ZS vs short PANW (Palo Alto Networks) 1:0.6 to express SSE share gain vs legacy appliance risk. Rotate 5–10% from legacy security/appliance names into semis/AI infra over 3–12 months.

Contrarian angles: Consensus underestimates the fragility of platform moats — CUDA advantage is real but not impregnable; history (Intel’s 90s/2000s dominance) shows software and standards can flip with hyperscaler economics. The market may be pricing near‑term growth into long-term multiples (NVDA 44x, ZS 72x adj. EPS); mean reversion of 15–30% is plausible if AI capex seasonality or regulatory shocks hit. Unintended consequence: large passive/ETF concentration into NVDA increases systemic liquidation risk during drawdowns — keep position sizing disciplined and liquidity-managed.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in NVDA now; scale in on any >10% pullback. Hedge with 0.5% notional by buying Jan 2027 200‑strike puts (protects downside to ~-40%) or implement a Jan 2027 200/320 call spread (debit) to express upside to $250–$320 by mid‑2026/2027.
• Initiate a 1–1.5% long position in ZS via shares or Jan 2027 250C LEAPs, but only add if revenue from AI security continues >50% YoY over next two quarters; set a profit target of $330 by Jul 2028 and a stop-loss at $185 (≈-25%).
• Execute a 1% pair trade: long ZS : short PANW (0.6x notional) to capture SSE share gains vs legacy appliance exposure; rebalance if PANW reports >5% QoQ margin improvement or ZS AI revenue growth decelerates below 30% in a quarter.
• Before increasing exposure, monitor three catalysts over the next 30–60 days: (1) NVDA guidance for DC GPU bookings and China revenue sensitivity, (2) ZS quarterly AI‑security revenue cadence and customer count growth, and (3) any new US/China export-control announcements — if any catalyst is negative, trim NVDA/ZS exposure by 25–40% within 5 trading days.