The U.S. equity market has shifted in 2026. After years of being driven by tech stocks, the S&P 500 (^GSPC 1.52%) has found new leadership from energy, materials, and consumer staples stocks. Diversification is being rewarded again.
Does that still make the Vanguard S&P 500 ETF (VOO 1.53%) a good investment? The index has outperformed most market sectors in recent years thanks to tech leadership and its heavy weighting toward the "Magnificent Seven" stocks. Can it still do well when other areas of the market are leading?
Let's look at some of the biggest factors facing the S&P 500 right now.
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To cut or not to cut
According to Fed Funds futures, the market is currently pricing in roughly two rate cuts in 2026, with the first likely possibility being at the June meeting. Current trends suggest the Federal Reserve may have a tough time getting there.
The latest PCE inflation data, which is the Fed's preferred measure, showed an annualized rate of 2.9% in December, the highest since March 2024. Given that this inflation measure is trending higher, not lower, it's tough to justify the Fed making significant cuts with inflation so far above target. Several Fed members have suggested as much recently.
Rate cuts have been a bullish tailwind for stocks. Without them, stocks might have to do more work to push higher.
NYSEMKT: VOO
Key Data Points
Recession risk
For the most part, economic growth has sustained throughout the current cycle. Annualized GDP growth rates of 3% to 4% over the past several quarters have suggested that the economy is humming along.
But affordability issues, rising debt levels, stubborn inflation, and a stagnating jobs market continue to loom. All of those have the potential to be recessionary signals even though nothing seems imminent.
Earlier in February, the fourth-quarter GDP growth reading came in way below expectations. While part of that could be explained by the government shutdown, it adds to the signs of vulnerability building in the economy.
Driven by earnings growth
As of Feb. 13, 74% of S&P 500 companies had reported their fourth-quarter earnings. So far, index components have delivered a year-over-year earnings growth rate of around 13%.
This could be the strongest piece of evidence supporting the "buy the S&P 500" investment case. Even though index performance is influenced by several factors and can be volatile in the short term, earnings growth is central to the long-term bull argument.
As long as companies continue to grow their earnings, the argument for higher share prices will be stronger.
The Vanguard S&P 500 ETF is a buy
If your time horizon is 10 years or longer, the S&P 500 will usually be a buy. There will be corrections along the way, but this is usually enough time to ride out some of those highs and lows to generate positive returns.
In the near term, there's a cautious bull case for the S&P 500. Earnings growth expectations are healthy enough to support higher stock prices. But there are also enough question marks surrounding the labor market, debt, and the number of rate cuts this year to make it far from a done deal.
A lack of tech leadership could be reason for concern, but there has been enough improved performance from other areas of the market to believe the uptrend can continue.
