Excitement about AI stocks has driven the S&P 500 to record levels this year.
The major benchmark is on track for its third annual increase — and gains have been in double digits each time.
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The S&P 500 It’s headed for its third consecutive annual gain in double digits as bull market momentum continues — and the index also closed at record levels in recent days. What drives this seemingly unstoppable energy? Over the past few years, investors have flocked to artificial intelligence (AI) stocks – in many cases, these players weigh heavily on the index, so they can significantly influence the direction of the index. I am talking about names like Nvidia and AlphabetFor example, AI stocks that are up more than 30% and 60% this year, respectively.
Investors are betting on AI players because the technology could be a potential game changer, like the Internet or, far from travel, the telephone or the printing press. In the case of AI, analysts expect it to make doing business easier, faster and cheaper – and AI can also spur innovation. All of this makes it a very promising technology, and one that has already supercharged certain companies’ earnings and stock performance.
A low-interest rate environment has also spurred investor optimism over the past year after the Federal Reserve initiated a series of rate cuts — the most recent one this month. Lower rates equal lower borrowing costs for companies, and more purchasing power for consumers – all of which are positive for income growth.
This market momentum has done something the stock market has seen only twice in the past 153 years — and the history of what could happen in 2026 is clear.
Image source: Getty Images.
The excitement over the past couple of years has been accompanied by solid earnings growth from major tech giants and ongoing spending on AI. and provider of AI products and services, from Nvidia Amazon and Palantir TechnologiesTalked about a big demand. Customers are flocking to them for help in building AI platforms or implementing AI in their business.
All this has prompted the market to do something rare in recent times, something witnessed only twice — in 2000 and today. It is related to the S&P 500 Shiller CAPE ratio, an inflation-adjusted valuation measure. The metric considers earnings per share and stock price over a 10-year period.
In recent times, the S&P 500 Shiller CAPE ratio has reached a level of 39 — the only other time it has reached, and even exceeded, this level was 20 years ago when dot-com stocks rose in value.
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. Although investors have been concerned about such a scenario in recent weeks, the evidence does not strongly support it. The AI boom has been supported by solid companies with the financial strength to invest in this new technology, and as I mentioned earlier, earnings continue to grow.
Still, the Shiller CAPE ratio tells us that stocks are expensive right now—at their second-highest level. And history is very clear about what could happen in 2026. After each significant peak in valuations, the S&P 500 has declined — in the chart below, you can see this trend over the past decade. Given the sky-high 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 accurate. Although the decline eventually occurs, because the index cannot climb uninterrupted forever, this movement may be much slower than expected. Second, the S&P 500 may be on a downward track in 2026, but that does not mean that this trend will last the year, and the index will end in depression. It is possible that stocks will retreat for a few weeks or months and then recover.
And finally, the most important point of all is the following – and this is something that history has always been right about. Even after the worst declines and market crashes, the S&P 500 has recovered and advanced each time. How can you benefit from it? By buying quality stocks and holding for the long term — so you can make significant gains no matter what the market does in 2026.
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Adria Cimino has a place on Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Nvidia, and Palantir Technologies. Motley Fool has a disclosure policy.
The stock market is doing something it’s only witnessed twice in 153 years — and history is very clear about what might happen in 2026. Originally published by The Motley Fool.
