In an uncommon streak, the S&P 500 has posted double-digit percentage gains in each of the last three years. In 2023, the index closed with an impressive 24.23% increase, which translates to 26.06% when dividends are reinvested. The following year, 2024, the market continued its robust performance with a 23.31% gain, or 24.88% including dividend reinvestments. Most recently, the index ended last year with roughly a 16.4% increase, amounting to approximately 18% total return when dividends were factored in.
Investors who had allocated $10,000 into an S&P 500 index fund three years ago would now be looking at a portfolio valued around $18,600, marking a significant appreciation over a relatively brief period. This strong performance has been underpinned by solid corporate earnings across sectors and the ongoing integration and advancement of artificial intelligence technologies, which have contributed to growth expectations into the near term.
However, while the recent upward momentum might suggest further gains are possible in 2026, caution is advised based on valuation metrics. One key measure that has drawn attention is the cyclically adjusted price-to-earnings ratio, commonly referred to as the CAPE ratio. This gauge measures the market’s price relative to average earnings over a ten-year period, providing a normalized view that reduces noise from short-term fluctuations.
Notably, in 2025, the CAPE ratio climbed to approximately 40, marking its second-highest reading since records began in 1871. The solitary prior instance where the CAPE reached such elevated territory was in 1999, immediately preceding the significant market downturn known as the dot-com crash around March 2000.
The elevated CAPE ratio serves as a reminder that the stock market currently carries a high valuation relative to its historic earnings power. In periods when the CAPE has been at such extremes, subsequent future returns have often been lower compared to intervals following more moderate or low CAPE values.
It is important to clarify that a high CAPE reading does not constitute a certain forecast of a market decline or crash. Rather, it functions as an indicator highlighting that the market is richly priced by historical standards. Investors are encouraged to maintain rational investment decisions, focusing on identifying and holding high-quality securities that possess the durability to weather potential periodical market volatility or corrections.
Recognizing this valuation backdrop, market participants should assess risks carefully while considering portfolio positioning. While strong corporate earnings and artificial intelligence developments provide bullish catalysts, elevated market valuations imply that future returns may be tempered or more volatile than recent years.