Investing in the S&P 500 has been nothing short of lucrative over the past three years. Since the beginning of 2023, the index has seen a total return of 90% (as of Jan. 29, 2026). Fueled by the "Magnificent Seven" tech stocks and boosted by the emergence of artificial intelligence (AI), U.S. large-cap stocks have been among the best-performing areas in the global equity markets.
But the economy is evolving. The labor market is slowing, and inflation remains stubbornly elevated. Perhaps more importantly in the eyes of investors, valuations are being stretched. The Vanguard S&P 500 ETF (VOO 1.23%) trades at a price-to-earnings ratio (P/E) of 28. That's among the most expensive levels it has reached over the past 100 years.
That complicates evaluating whether the S&P 500 is worth investing in right now. Let's break down some of the major factors to consider in 2026.
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1. The earnings outlook is still constructive
While momentum, geopolitics, and investor sentiment can drive equity returns in the short term, long-term performance still relies on earnings and revenue growth. On that front, the S&P 500 has the fundamental support to keep pushing higher.
A recent report by financial data and software company FactSet says: "For 2025, S&P 500 companies are reporting year-over-year growth in earnings of 12.4% and year-over-year growth in revenues of 7.2%. For 2026, analysts are projecting earnings growth of 14.7% and revenue growth of 7.3%."
The market is much more vulnerable to a correction if there's a significant slowdown in earnings growth. If forecasts hold, we're just not seeing that right now. Most of the earnings growth is still being driven by large-cap stocks. That increase probably needs to broaden into other sectors to support a sustainable rally, but the overall index fundamentals still look pretty good.
2. Valuations can hold if earnings growth does
There's a belief among many people that because P/E ratios are higher, they have to come back down. That's probably true eventually, but valuations can remain elevated for some time as long as there are good growth stories to support them.
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Key Data Points
If inflation remains under control and the jobs market can at least stay resilient, investors might not find a good reason to make valuations shrink. If we get those conditions in 2026 and earnings grow around 15%, there's a reasonable path toward 15% returns if the S&P 500's P/E holds steady.
It might not necessarily make investors feel better about how expensive U.S. stocks are, but it could still be enough to generate double-digit returns again for large caps.
3. The tilt toward quality is a factor if markets turn lower
In times of market turmoil, investors tend to favor quality. Companies backed by strong cash flows, earnings, and healthy balance sheets often attract attention from folks looking for a little more durability and safety.
Some of the best fundamental quality right now is offered by the Magnificent Seven. They're spending a lot of money developing AI, but they're also generating revenue and earnings growth from it. If conditions turn south or the market begins to decline, it's possible that the top-heaviness of the Vanguard S&P 500 ETF actually helps provide some downside cushion.
4. Further hope for rate cuts
It's unclear how much the Fed will cut interest rates in 2026, if it does at all. The market still believes that the Fed will make one or two cuts this year. It's not the three or four the market was pricing in a few months ago, but even a modest reduction in the Fed Funds rate could provide a tailwind for U.S. stocks.
The Vanguard S&P 500 ETF still looks like a buy
Investing in the S&P 500 today doesn't come without risks. Concentration is high; valuations are high. The geopolitical environment is getting tense. And we don't know how long consumers can keep spending, with affordability such a key issue.
But if your base case is still no recession in 2026 and there's no unexpected shocks, the S&P 500 and this Vanguard exchange-traded fund still look like a buy. Earnings growth is still there, the rise in gross domestic product is still running around 4%, and unemployment is still historically low (even if it is off its lowest levels). Those factors are generally a good recipe for further gains in the S&P 500.
