The S&P 500 has achieved remarkable milestones in 2025, concluding the year at record highs for the third consecutive year, boasting a double-digit gain. In 2023, the index closed 24.23% higher, with dividends reinvested bringing that figure to 26.06%, followed by a gain of 23.31% in 2024 (24.88% with reinvested dividends). The more recent year saw the S&P 500 rise approximately 16.4% (18% when factoring in dividends).
Investors who put $10,000 into an S&P 500 index fund three years ago would see that investment swell to around $18,600 today, a notable return amid a thriving market bolstered by solid corporate earnings and ongoing advancements in artificial intelligence (AI). As market optimism remains, projections for 2026 suggest that the current momentum could persist.
However, this optimism comes with caution. Investors are urged to avoid irrational exuberance, especially considering that a significant market behavior typically observed only once in a century is unfolding. The high valuations in the S&P 500 echo a past episode with dire outcomes: the dot-com crash of March 2000.
A particularly concerning metric is the cyclically adjusted price-to-earnings (CAPE) ratio, which has surged to approximately 40 in 2025— its second-highest level since records began in 1871. The only prior instance reaching such heights occurred in 1999, right before the infamous dot-com bubble burst. The CAPE ratio offers insights into the market’s valuation. A high CAPE indicates that stocks are expensive relative to their earnings potential, historically correlating with lower future returns.
While the elevated CAPE levels don’t definitively signal an impending market crash in 2026, they underscore the necessity for investors to remain vigilant. A high CAPE serves as a reminder that while not all stocks need to be sold immediately, investors should focus on high-quality stocks that are likely to endure any potential market fluctuations.
