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I S&P 500 is the most popular stock market index in the world. Representing the 500 largest companies in the world’s largest economy, the US’s leading benchmark tracking funds are a core investment in the portfolios of many British investors.
In eight of the past 10 years, the S&P 500 has generated positive returns. Last year was another success story, despite President Trump’s tax measures and global conflicts. But are US stocks poised to crash in 2026? Here’s my take.
Warning signs
Every year, many commentators and commentators prophesy about the crash of the stock market. Equally, many oppose doomsayers with bullish predictions of positive gains. The truth is, no one knows what will happen for sure.
However, we can compare where we are today to previous periods in history and draw conclusions accordingly. Worryingly, there are red flags for S&P 500 stocks as we head into the new year.
Another is Shiller’s price-to-earnings (P/E) ratio. This valuation metric divides the current price of the S&P 500 by the average of the last 10 years of inflation-adjusted earnings.
Currently, it is at 40.74. To put that number in context, that’s the second highest rate in history, surpassed only by the dot bubble. Many fear that an artificial intelligence (AI) bubble is popping in today’s stock market. If the bubbles pop, the next crash can cause damage.
Capital spending on AI by S&P 500 companies was around $400bn by 2025. Estimates for this year are over $500bn. If sentiment changes, 2026 could be very painful for investors in US stocks.
Reasons for optimism
Drawing parallels with the 90s is tempting, but there are important differences between the S&P 500 then and today. Back in the dot-com era, many technology stocks lacked profitability and strong cash flow. Rapid stock price increases were often driven by perceived confusion.
Arguably, today’s mega-cap tech firms are in the best shape. They are highly profitable businesses with strong fundamentals across a range of metrics.
The power of AI may drive stock prices higher, but the tangible benefits may prove exciting. Those expecting a crash in the S&P 500 this year may find their fears unfounded.
Magnificent 7 is an underrated stock
A total crash is possible, but I err on the side of optimism. After all, the great Benjamin Graham said: “In order to be an investor, you must be a believer in a better future“.
But, I’m also aware of overstating the amount, too. That’s why I recently invested Meta Platforms (NASDAQ:META), owner of Facebook, Instagram, and WhatsApp.
With a forward P/E multiple of around 22.2, Meta is the cheapest Magnificent 7 club in this metric. I think the stock could shine this year, as long as the overall market doesn’t crash.
Third quarter earnings were impressive, with revenue up 26% to $51bn and daily users up 8% to 3.54bn. Targeted advertising continues to be the company’s money machine and the scope of its channel in the social media world cannot be overstated.
Regulation is a growing threat to the company. Australia’s ban on social media for under-16s could encourage other countries to follow suit, which could hurt Meta’s price.
Still, I think Mark Zuckerberg is one of the most talented and competitive S&P 500 CEOs. At today’s price, Meta could be a long-term outperformer.
