From 2023 through 2025, the S&P 500 index recorded an impressive 78% increase, a performance demonstrating the substantial benefits available through broad market investments. Popular exchange-traded funds, such as the Vanguard S&P 500 ETF and the SPDR S&P 500 Trust, have capitalized on this growth, with the Vanguard ETF managing assets totaling approximately $1.5 trillion, surpassing the market capitalizations of all but a few individual U.S. companies. Such vehicles provide investors convenient exposure to overall market performance.
Given this backdrop of consecutive years featuring double-digit returns, questions are emerging about the sustainability of the upward trajectory into 2026. To approach this, it is useful to analyze the fundamental drivers behind the recent surge and to draw insights from historical patterns within the market.
To contextualize the recent gains, it is important to recall that the market was not always as buoyant. In 2022, the S&P 500 suffered an 18% decline, and major technology companies like Amazon and Nvidia each lost approximately half of their market value. This environment was challenging for investors, who faced uncertainty amid economic difficulties characterized by rising inflation and an increase in interest rates from near zero levels. Concerns about an impending recession were widespread.
In an unexpected turn, late 2022 witnessed the debut of ChatGPT, ushering in a generative and agentic artificial intelligence boom. This technological development catalyzed renewed confidence in the market as corporations increased their spending to harness AI capabilities. The economic indicators throughout this period suggest sustained strength despite ongoing inflationary pressures, with interest rates now trending downward and no recession materializing.
Turning to valuation measures, the market today is experiencing heightened pricing levels. The cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 has risen 40% over the last three years, currently standing at 39. This valuation metric has previously approached such elevated readings only once, in the year 2000, before a significant market correction took place.
The 2000 market downturn commenced after a similar period of strong gains lasting about five years, after which the market endured three years of declines before resuming a subsequent sequence of gains. Historically, since 1930, the market has undergone five periods characterized by at least four consecutive years of growth, underscoring that while uncommon, extended bull markets are possible.
For investors considering their positions as 2026 approaches, the current conditions suggest a cautiously optimistic outlook. The environment of falling interest rates combined with steady consumer spending and ongoing AI-driven innovation supports the potential for continued market growth. The profitability and liquidity of leading AI-oriented companies further reduce the likelihood of an imminent bubble burst.
Nonetheless, given the increased valuations, it is prudent for investors to prepare for variability in outcomes. A diversified portfolio balancing growth and defensive assets can provide a safeguard against possible downturns. Maintaining some liquidity may also enable timely investment opportunities should market prices decline.
Overall, the historical evidence and present economic indicators reinforce the value of sustained investment strategies. Although future market performance cannot be predicted with certainty, remaining invested and allowing capital to grow over time has proven to be an effective approach to wealth accumulation through decades.