Barring an unexpected late-month collapse in the markets, the S&P 500 (^GSPC 1.22%) is going to finish this year with a return that's well above its historical average, yet again. As of Dec. 18, the index, which is a collection of the leading companies on U.S. exchanges, is up more than 15%.
Historically, the S&P 500 has averaged returns that are closer to 10%. While this past year wasn't as strong as in 2024 or 2023, when it was up by more than 23%, this has been an incredibly strong three-year period for the stock market. Since 2023, the index has soared by 77%, more than making up for a tough year in 2022 when it fell by 19%.
Heading into next year, however, is it possible for the S&P 500 to deliver double-digit percentage gains yet again, or should investors brace for a slowdown, or even possibly a crash?
Image source: Getty Images.
Can the S&P 500 outperform its long-run average for a fourth consecutive year in 2026?
Assuming the S&P 500 finishes this year up by 15%, this will be the sixth time in the past seven years, going back to 2019, that it's risen by at least that much. The only blemish was the broad market sell-off that occurred in 2022. To put into perspective just how impressive that is, consider that in the previous seven-year period, from 2012 to 2018, the S&P 500 rose by 15% or more only twice.
Now, if we're looking at just outperforming its long-run average of 10% and assessing how probable it is the streak will continue next year, things don't look particularly encouraging. The last time the S&P 500 was up by at least double digits, for four straight years, was in the late '90s, leading up to the infamous dot-com crash. What may be of some comfort to investors, however, is that back then it was technically on a streak of five years of double-digit gains before the big downturn in the markets. The next occurrence of a four-peat of the S&P 500 beating its average goes back to the early post-war period, 1949 to 1952. Suffice to say, this type of performance for the index is by no means typical.
Top banks remain bullish on the S&P next year
Although historical trends don't appear to suggest that it's probable for the index to rally by 10% or more in 2026, many top banks on Wall Street appear to disagree. For the S&P 500 to climb by another 10%, that would put it at roughly 7,500.
Morgan Stanley believes the index could finish the year as high as 7,800, as does Wells Fargo. Deutsche Bank is among the most bullish, expecting the index to reach 8,000. JPMorgan believes it can reach that milestone, but that's only if rate cuts continue.
What should investors do in 2026?
Although there's still plenty of optimism in the markets, that doesn't mean investors should assume that it will be another fantastic year for the S&P 500 in 2026. Analysts aren't always right; there could very well be a slowdown next year. Many tech stocks, for example, look extremely overpriced. For those types of stocks, there could be significant sell-offs coming in the not-too-distant future, and they could weigh down the index in the process. The hype around artificial intelligence has pushed some stocks to sky-high valuations that simply don't look sustainable.
This is why I believe it's imperative for investors to consider reducing exposure to these types of investments in 2026, and move into safer stocks that at least trade at more modest prices. Crashes and corrections can be difficult if not impossible to predict. And rather than trying to time the market, a more effective way to protect your portfolio in the event of a downturn is to always be cognizant of valuation, and as the old Warren Buffett saying goes, "be fearful when others are greedy."
