The S&P 500 wrapped up 2025 with a total return of about 18%, the third straight year above historical norms but a lower figure than the gangbusters 25% returns of 2023 and 2024. AI euphoria is still the strongest market trend entering 2026, and the usual suspects like NVIDIA Corp. (NASDAQ: NVDA) and Alphabet Inc. (NASDAQ: GOOGL) are up once again on the first day of trading. If you’ve ridden the AI rally since the market bottomed in 2022, you’re likely sitting on substantial gains and may feel compelled to diversify, especially if you have a tech-heavy allocation.
The S&P 500 is entering the year trading at 26x forward earnings, a stark elevation above its 20-year average of 16x forward earnings. When valuations are this elevated, investors become ravenous for earnings growth, and high-multiple stocks can fall out of favor quickly if growth slows even a little. And if rates remain high, 2026 could be the year value investing makes a comeback.
