Excitement over AI stocks has driven the S&P 500 to record highs this year.
The main benchmark is on track for its third annual increase – and each time the gains have been in double digits.
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the S&P 500 is heading for its third consecutive annual double-digit gain as bull market momentum continues – and the index has even closed at record highs in recent days. What is driving this seemingly unstoppable energy? Over the past few years, investors have rushed into stocks of artificial intelligence (AI) – in many cases, these players weigh heavily in the index, so they can significantly impact the direction of the index. I’m talking about names like Nvidia and Alphabetfor example, AI stocks which have risen more than 30% and 60%, respectively, this year.
Investors are betting on AI players because the technology could be a potential game changer, like the internet or, traveling much further back in time, the telephone or printing. In the case of AI, analysts expect it to make business operations easier, faster and cheaper — and AI can spur innovation as well. All this makes it a very promising technology, and one that is already raising the earnings and stock performance of certain companies.
A lower interest rate environment has also fueled investor optimism over the past year, as the Federal Reserve has launched a series of rate cuts – with the most recent occurring this month. Lower rates equal lower borrowing costs for companies, and more purchasing power for the consumer — all of which is positive for earnings growth.
This market momentum has caused the stock market to do something it has seen only twice in the last 153 years – and history is very clear about what could happen in 2026.
Image source: Getty Images.
The enthusiasm over the past few years has been accompanied by solid earnings growth from major tech giants as well as continued spending in AI. And those who provide AI products and services, from Nvidia to Amazon and Palantir Technologiesthey talked about huge demand. Customers are flocking to them for help building AI platforms or applying AI to their businesses.
All this prompted the market to do something rare in recent times, something seen only twice – back in 2000 and today. This relates to the S&P 500 Shiller CAPE ratio, an inflation-adjusted measure of valuation. The metric takes into account earnings per share and stock price over a 10-year period.
In recent times, the ratio S&P 500 Shiller CAPE reached the level of 39 – the only other time it reached, and even exceeded, this level was more than 20 years ago, as the prices of dot-com stocks increased.
S&P 500 Shiller CAPE ratio data from YCharts
Now, you might say: Uh, oh…does that mean we’re in a bubble? Not necessarily. Although investors have worried about such a scenario in recent weeks, the evidence does not fully support it. The AI boom is supported by strong companies with the financial strength to invest in this new technology, and as I mentioned earlier, the growth in earnings continues.
Still, the Shiller CAPE ratio is telling us that stocks are expensive right now – at their second highest level ever. And history is very clear about what can happen in 2026. After each significant peak in valuation, the S&P 500 has continued to fall – in the graph below, you can see this trend over the past decade. Given the high level of valuations right now, if history is right, the S&P 500 is on track to decline next year.
S&P 500 Shiller CAPE ratio data from YCharts
But there are a few things to keep in mind. First, the story is not always good. Although a decline will eventually occur, because the index cannot rise uninterrupted forever, this movement may come much later than expected. Second, the S&P 500 may be on track for a decline in 2026, but this does not mean that the trend will last the whole year, and the index will end in the doldrums. It is possible for stocks to pull back for a few weeks or months and then recover.
And finally, the most important point of all is this — and it’s something that history has always been right about. After even the worst declines and market crashes, the S&P 500 continued to recover and advance each time. How can you benefit from this? By buying quality stocks and holding for the long term — so you can get a significant win regardless of what the market does in 2026.
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Adria Cimino holds positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
The Stock Market Is Doing Something Witnessed Only 2 Times in 153 Years — and History is very clear about what could happen in 2026. was originally published by The Motley Fool
