Palantir Technologies (PLTR +1.25%) has been trouncing the markets for the past few years. This year, it's one of the S&P 500's top performers. As of Dec. 16, the artificial intelligence (AI) stock was up around 150%, while the broad index had risen 16%.
And since the launch of ChatGPT on Nov. 30, 2022, which opened up the floodgates for all things related to AI, the share price of Palantir has soared by 2,400%. The S&P 500's gains during that time frame: 67%.
Heading into next year, it almost seems like a foregone conclusion that Palantir will rise again. Or could this high-flying data analytics stock finally run into some headwinds? Here's what I think will happen in the market next year, and where the AI stock could finish by the end of 2026.
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Palantir's high valuation could make it extremely vulnerable in 2026
Palantir is an expensive stock, with a market cap of around $450 billion today. Its ascent is a symptom of broader market issues, where many tech stocks have surged to unsustainable valuations due to the hype around AI.
It trades at a price-to-earnings multiple (P/E) of over 400, which suggests retail investors are treating this as a speculative buy, since the fundamentals don't support such an egregious valuation.
Stocks can temporarily rise to high levels, but they normally correct after a while. In Palantir's case, it's been trading at an extremely high earnings multiple for a while now.
Data by YCharts.
For almost the entire year, the stock has been at a P/E of over 400. And even for much of 2024, its P/E was already looking incredibly high at over 200.
This may suggest that the market has shown a willingness to support such a high premium, and thus it can be sustainable, but I believe Palantir has simply become a hybrid of a meme and a growth stock. And with meme stocks being hot recently and investors clearly having an appetite for risk, that explains why the stock has been able to remain at such extremely high levels for so long. But that doesn't mean it will remain that way for long.
Why things could change drastically for the stock market next year
The economy and the stock market have looked disconnected for a while now. Layoffs are on the rise again, retailers are saying their core customers are struggling, and discount retailers are seeing more high-income shoppers frequent their stores. These are all signs that the economy is not doing well, despite the growth related to AI. Sooner or later, these two realities are likely to converge, which isn't going to be good for high-priced stocks like Palantir.
NASDAQ: PLTR
Key Data Points
In 2026, one development that retail investors will want to watch out for is who the next Fed chair will be. Chances are, it will be someone who will be eager to cut rates for the sake of appeasing the president. That could lead to investors losing confidence in the path forward for the economy, raising the risk that inflation may once again be on the rise.
And Palantir investors shouldn't forget what happened the last time the market was in disarray in 2022, when it crashed. The S&P 500's 19% decline looked trivial when compared to the tech company's 65% drop-off in value. This time around, with a higher valuation, Palantir will have much further to fall.
Where could Palantir's stock finish in 2026?
By the end of 2026, I expect there will be some turmoil in the markets, and where Palantir's stock will end up will likely depend on how long it's been going on for. I think the stock will ultimately finish the year below $100, with an outside chance that it falls below $50.
Even if that doesn't end up happening, investors should be careful not to ignore valuations, because buying a good company at an egregious price can still turn out to be a bad choice in the end. Palantir has been synonymous with AI's growth in recent years. And in the future, its falling valuation may be symbolic of the bubble bursting.
