For three consecutive years, the S&P 500 (^GSPC 1.52%) has grown faster than average corporate earnings, with the index gaining 16.4% in 2025, 23.3% in 2024, and 24.2% in 2023.
Based on metrics like its price-to-earnings (P/E) ratio and forward P/E, the S&P 500 is trading at a bit of a premium. The index's forward P/E of 22.1 tops both its five-year moving average of 21.15 and its 10-year moving average of 20.3.
But the S&P 500 is far more growth- and tech-oriented than it was years past. Today, 34.4% of the index's value comes from tech stocks, and just 20 components account for roughly half of its value. Since many top S&P 500 companies have strong growth rates and high margins, it stands to reason that the S&P 500 and artificial intelligence (AI) stocks in general deserve premium valuations.
That sentiment was reflected in The Motley Fool's 2026 AI Investor Outlook Report. Among those who responded to the survey, 62% said they were confident that companies investing heavily in AI will deliver strong returns over the long run. The figure jumped to 93% among respondents who already owned AI-related stocks and AI exchange-traded funds. And 65% to 71% of survey respondents earning between $150,000 and $200,000 or more annually said they were confident in AI's ability to generate long-term results.
Despite those upbeat sentiments, no one knows for sure what will happen to these AI-focused companies in the near term, and their long-term success will depend heavily on how the technology is adopted and AI's impact on the broader economy. As is true with most technological shifts, the greatest asset that retail investors have in this case is time.
Image source: Getty Images.
Earnings growth justifies higher valuations
Kenneth Fisher, the founder of Fisher Investments, famously quipped: "Time in the market beats timing the market." In other words, investing in high-quality companies and allowing those positions to grow and compound in value over many years is more powerful than securing a great initial price on a stock. That adage carries weight as we kick off 2026 with the broader indexes hovering around their all-time highs and at relatively expensive valuations.
Time in the market works because long-term earnings growth helps justify previously high valuations. Today's leading S&P 500 companies have soared in value for years, and in some cases, decades, because their earnings have gone up. Investors are willing to pay higher prices for stakes in these companies based on their fundamentals -- not on euphoria.
As an example, Nvidia (NVDA 1.55%) trades today at around 40.2 times forward earnings -- which isn't cheap by any means. But it's expensive because the stock has done very well in recent years, even as the underlying business has grown its earnings exponentially. But Nvidia could still be a great buy now, and the stock has what it takes to deliver market-beating results even if its earnings multiple contracts.
That can happen if Nvidia's earnings growth outpaces the growth rate in its stock price. Analysts' consensus estimates are for Nvidia to earn $7.57 per share in its fiscal 2027 compared to 4.69 per share in its fiscal 2026 (which ends this month) -- a staggering 61.4% increase. In summary, Nvidia's valuation will likely decrease in 2026 unless the stock has a strong year or it misses earnings estimates significantly.
NASDAQ: NVDA
Key Data Points
Expect AI stocks to contribute to overall volatility
The primary reason to be optimistic about AI stocks, despite concerns about their potential volatility, is that the leading companies in the space are growing their profits at such rapid rates that they can justify their expensive valuations.
This catalyst could help the S&P 500 and AI stocks continue delivering excellent returns for investors, but it could also amplify a broader stock market sell-off if there's a cyclical decline in AI stocks and their earnings growth slows.
The best way to manage that risk is to invest with a long-term mindset, which will allow you to better withstand short-term periods of volatility.
