Excitement over AI stocks has driven the S&P 500 to record highs this year.
The major benchmark is on track for its third annual gain — and each time the gain has been double-digit.
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The S&P 500 is headed for its third straight annual double-digit gain as the bull market momentum continues — and the index has even closed at record highs in recent days. What caused this seemingly unstoppable energy? Over the past few years, investors have rushed into artificial intelligence (AI) stocks — in many cases, these players weigh heavily in the index, so they can have a significant impact on the direction of the index. I’m talking about names like Nvidia and Alphabetfor example AI shares which are up over 30% and 60% respectively this year.
Investors are betting on AI players because the technology can be a potential game changer, like the internet or, traveling much further back in time, the telephone or the printing press. In the case of AI, analysts expect it to make business operations easier, faster and cheaper — and AI can also drive innovation. All of this makes it a very promising technology, and one that has already supercharged 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 rolled out a series of interest rate cuts — the most recent occurring this month. Lower rates equal lower borrowing costs for businesses and more purchasing power for the consumer — all of which are positive for earnings growth.
This market momentum caused the stock market to do something it’s only seen twice in the past 153 years — and history is very clear about what could happen in 2026.
Image source: Getty Images.
The enthusiasm over the past two years has been accompanied by solid earnings growth from top 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 enormous demand. Customers flock to them for help building AI platforms or applying AI to their businesses.
All of this has caused the market to do something rare in recent times, something it has only seen twice — in 2000 and today. This has to do with the S&P 500 Shiller CAPE ratio, an inflation-adjusted measure of valuation. The value takes into account earnings per share and stock price over a 10-year period.
Lately, the S&P 500 Shiller CAPE ratio has hit 39 — the only time it reached, and even surpassed, that level was more than 20 years ago as dot-com stock prices soared.
S&P 500 Shiller CAPE Ratio data by YCharts
Now, you might say, Uh, oh…does that mean we’re in a bubble? Not necessarily. While investors have worried about such a scenario in recent weeks, the evidence does not strongly support it. The AI boom is supported by solid companies with the financial strength to invest in this new technology, and as mentioned earlier, earnings growth continues.
Still, the Shiller CAPE report tells 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 every significant peak in valuation, the S&P 500 has continued to decline — in the chart below, you can see this trend over the past decade. Given the skyrocketing level of valuations right now, if history is correct, the S&P 500 is on track to decline next year.
S&P 500 Shiller CAPE Ratio data by YCharts
But there are a few things to keep in mind. First, history is not always correct. Although declines eventually occur, as the index cannot climb continuously forever, this move could come much later than expected. Second, the S&P 500 may be headed for declines in 2026, but that doesn’t mean the trend will last the entire year and the index will end stagnant. Stocks may retreat 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. Even after the worst market declines and crashes, the S&P 500 has 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 make a significant profit regardless of what the market does in 2026.
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Adria Cimino has 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 it’s only seen twice in 153 years — and history is very clear about what can happen in 2026. was originally published by The Motley Fool
