Excitement over artificial intelligence stocks has pushed the S&P 500 to record highs this year.
The major benchmark is on track for its third annual gain, each by double digits.
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this S&P 500 Index The index is on track for its third straight year of double-digit annual gains as the bull market momentum continues, and the index even closed at record levels in recent days. What drives this seemingly unstoppable energy? Investors have piled into artificial intelligence (AI) stocks over the past few years — and in many cases, these companies have a significant presence in the index and can therefore significantly influence the direction of the index. I’m talking about names like NVIDIA and letterFor example, AI stocks have increased by more than 30% and 60% respectively this year.
Investors are betting on artificial intelligence players because the technology could become a potential game changer, much like the internet, or, going back even further, the telephone or the printing press. In the case of AI, analysts expect it will make business operations easier, faster and cheaper, and AI can also spur innovation. All of this makes it a very promising technology, and one that’s already significantly boosting some companies’ earnings and stock performance.
A lower interest rate environment has also stoked investor optimism over the past year, with the Federal Reserve launching a series of interest rate cuts, the latest of which came this month. Lower interest rates mean lower borrowing costs for businesses and greater purchasing power for consumers — all of which are good for earnings growth.
This market momentum has led to a situation in the stock market that has only happened twice in the past 153 years, and history is very clear about what 2026 is likely to happen.
Image source: Getty Images.
The enthusiasm of the past few years has been accompanied by solid earnings growth from leading tech giants and continued spending in artificial intelligence. Companies that provide artificial intelligence products and services, from Nvidia to Amazon and Palantir Technologyspoke of huge demand. Customers are turning to them for help building AI platforms or applying AI to their businesses.
All of this prompted the market to do something rare in recent times, something that has only happened twice before, in 2000 and today. This is tied to the S&P 500 Shiller CAPE ratio, an inflation-adjusted valuation measure. This metric takes into account earnings per share and share price over a 10-year period.
In recent times, the S&P 500 Shiller CAPE ratio has reached a level of 39 – the only time it was reached or even exceeded that level was more than 20 years ago, when Internet stock prices soared.
S&P 500 Shiller CAPE Ratio data provided by YCharts
Now, you might be saying: Uh-oh…does this mean we’re in a bubble? not necessarily. While investors have been concerned about this scenario in recent weeks, the evidence does not strongly support this view. The AI boom is supported by strong companies with the financial resources to invest in this new technology, and as I mentioned before, earnings continue to grow.
Nonetheless, the Shiller CAPE ratio tells us that stocks are currently expensive, at their second-highest level ever. History is very clear about what may happen in 2026. After every significant peak in valuations, the S&P 500 has continued to fall – you can see this trend over the past decade in the chart below. Given current extremely high valuation levels, if history is correct, the S&P 500 is expected to decline next year.
S&P 500 Shiller CAPE Ratio data provided by YCharts
But there are some things to remember. First, history is not always correct. Although the decline will eventually occur, since the index cannot climb uninterrupted forever, the move may occur much later than expected. Second, the S&P 500 may decline in 2026, but that doesn’t mean the trend will continue throughout the year and the index will end in the doldrums. Stocks may pull back for a few weeks or months and then recover.
Finally, and most importantly – history is always right. Even after the worst declines and market crashes, the S&P 500 continues to recover and rise every time. How do you benefit from it? By buying quality stocks and holding on to them for the long term, you could be on your way to a big win no matter what the market does in 2026.
Before buying S&P 500 stocks, consider the following factors:
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Adria Cimino works at Amazon. The Motley Fool owns and recommends Alphabet, Amazon, Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
The stock market is doing something that has only happened twice in 153 years – history is very clear about what may happen in 2026. Originally posted by The Motley Fool
