Over the past century, S&P 500 Index index (SNPINDEX:^GSPC) The average annual return is 7% (after inflation and dividend reinvestment). However, returns over the past three years have been exceptionally high, thanks in large part to the artificial intelligence (AI) revolution.
Between 2023 and 2025, the S&P 500 Index will increase by 78%. While some may believe that the stock market is destined for further gains, smart investors understand that nothing goes up forever.
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Let’s take a deeper look at some important yet largely overlooked topics in the market today and assess why they are so important. Will the stock market crash this year? Read on to find out.
It’s not uncommon to hear analysts talking about valuation metrics like the price-to-earnings ratio (P/E) or the forward P/E ratio. In fact, these indicators can be quite useful. However, they have the disadvantage that they do not take into account long-term trends.
A more useful number in this regard is the cyclically adjusted price-to-earnings ratio (CAPE). The CAPE ratio reflects inflation-adjusted earnings per share growth over a 10-year period. This helps smooth out and normalize anomalies and economic cycles.
Currently, the CAPE ratio is just below 40. As the chart above shows, the CAPE ratio has hovered around current levels only twice before.
The first example was in the late 1920s. After reaching its then-all-time peak, the S&P 500 plummeted in epic fashion, paving the way for the Great Recession.
In recent history, the CAPE ratio reached an all-time high of 44 as the dot-com boom continued in the late 1990s. Investors may remember that the dot-com bubble burst in 2000 and the stock market crashed.
History shows that the stock market should crash in 2026. That said, I see some important differences between current market conditions and the past.
First, the dot-com bubble was driven by speculation. In other words, many companies of that era did not have a complete business plan or a real online presence. Instead, many companies simply hinted that the Internet would fundamentally change them without real plans to leverage the technology.
The AI revolution is completely different. While the stock surge is similar to what investors witnessed in the late 1990s, this time, it might actually make sense. The world’s largest AI developers—the “Big Seven”—are already collectively monetizing AI in chips, enterprise software, cloud infrastructure, e-commerce, autonomous systems, robotics, consumer electronics, and more.
Going even further, hyperscalers plan to spend more than $500 billion on AI infrastructure this year alone. Given these details, I find it hard to believe the idea that the stock market and economy will collapse in 2026.
I do think there could be a brief pullback. So while the sell-off may not be imminent or long-lasting, the surge in asset prices may take a breather at some point.
With this in mind, I think the prudent approach to portfolio management in 2026 is to do the following:
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Reduce your investments in unprofitable, speculative stocks that you hope will one day be big winners. If a correction occurs, these companies will be the first to experience severe valuation declines.
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Own blue chip stocks with durable, resilient business models. These are best supplemented by a diversified portfolio with positions across various industries.
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Reserve cash temporarily. Establishing a healthy liquidity position will allow you to take advantage of any corrections and buy on dips.
Before buying S&P 500 stocks, consider the following factors:
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The stock market is sounding the alarm for the first time in 25 years. Here’s What History Says What’s Next in 2026 Originally published by The Motley Fool