The last three years have been quite pleasant for growth investors. Thanks to advances in artificial intelligence (AI), the technology sector has witnessed a once-in-a-generation boom that's spread to other industries across energy, industrials, utilities, and more. As such, it's been pretty hard to lose money in the stock market in recent years.
Unfortunately, the euphoria train seems to have hit a hiccup in 2026. So far this year, the S&P 500 (^GSPC 1.52%) has gained less than 2% while the Nasdaq Composite is unchanged.
Let's dig into what's causing the markets to take a breather. From there, we will dig into the strategies smart investors are employing to help weather current market conditions.
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Valuation: Is the Shiller CAPE ratio warning of 1999 repeating?
If you tune into financial news talk shows, it's common to hear economists and equity research analysts talk about valuation metrics. For instance, analysts love comparing a company's price-to-earnings (P/E) ratio relative to historical periods to help gauge whether the stock is overvalued or undervalued.
Although this approach can make sense, one of its flaws is that it does not fully account for anomalies such as periods of unusually high inflation or one-time line items that can benefit (or hurt) a company's earnings growth.
For this reason, smart investors turn to a different metric to help assess current market conditions. The cyclically adjusted price-to-earnings (CAPE) ratio, developed by economist Robert Shiller, accounts for a decade's worth of earnings relative to stock performances over that time frame. In this sense, economic outliers become smoothed out and investors are able to achieve a more normalized look at valuation.
S&P 500 Shiller CAPE Ratio data by YCharts
Right now, the S&P 500 Shiller CAPE ratio is hovering just below 40. The only other time the CAPE ratio was close to its current level was just before the dot-com bubble burst. With this overlap in mind, some investors are wary that history is poised to repeat itself and the stock market is warning us of another 1999 in the making.
AI vs. dot-com: Why this generational shift is and isn't a bubble
On the surface, it's easy to call the current AI revolution a stock market bubble given its similarities to soaring stock prices from the late 1990s. While I understand the comparison, I see the AI rally as quite different from the dot-com boom.
During the late 1990s, many companies merely relied on the potential of the internet rather than actually using the online domain to generate revenue or earnings. In other words, businesses were marketing vaporware -- tech products that do not actually work or provide useful efficiencies to their end users.
Against this backdrop, many companies during the early days of the internet were hemorrhaging cash and did not, in fact, have a legitimate growth roadmap. The quality of earnings from the AI wave have been much stronger than what investors witnessed two decades ago.
Cloud hyperscalers like Amazon, Alphabet, and Microsoft, as well as AI chip designers Nvidia, Taiwan Semiconductor Manufacturing, and Micron are all minting money. AI has become an epic bellwether for these and many other companies -- completely revolutionizing their business models and positioning them for long-term success as the multitrillion-dollar AI infrastructure era begins.
Portfolio playbook: How to invest when markets feel frothy
When the stock market feels inflated, it's not uncommon for investors to shift capital from volatile stocks and into more steady, predictable opportunities.
For instance, although AI has proven to be a net benefit for enterprise software, some companies have failed to gain meaningful traction or demonstrate that the technology doesn't undermine their business model. This is one reason software stocks are getting clobbered right now. In other words, AI is not a one-size-fits-all market opportunity. You need to be smart about which developers you invest in.
During periods of market uncertainty and emotionally driven panic selling, the best approach is often to be boring and play it safe. A specific thing you can do is trim your exposure to speculative or volatile stocks that you're hoping to turn into multibaggers.
Instead, opt for blue chip stocks with durable, resilient business models. This will help you create a diversified portfolio that's less vulnerable to harsh market corrections. Moreover, complementing these positions with a healthy cash balance will allow you to buy the dip during sell-offs -- doubling down on high-quality positions at a discount that should generate consistent gains for the long term.
