The S&P 500 (^GSPC 1.52%) is off to a sluggish start to 2026. As of Monday's close, the index was down just under 1%. While it's not an awful performance, it's not a terribly encouraging one, either. To make matters worse, global uncertainty and troubling economic conditions may only add to the overall risk in the market these days.
At the same time, however, investments in artificial intelligence (AI) remain high, and many companies are still performing exceptionally well. The end result is a fairly complicated picture. A year ago, the threat of tariffs spooked investors, but the S&P 500 would end up having a great performance, reaching new records and rising by more than 16%.
Here's how I think the index will do this year, and where it might finish.
Image source: Getty Images.
Why the S&P 500 could finish the year below 6,500
There are multiple factors that may adversely impact markets this year, ranging from an economic slowdown to the war in Iran. And stock prices have also been elevated for a while now, making a correction overdue.
The Shiller price-to-earnings (P/E) ratio is above 39, and it's the highest it's been since the early 2000s, right before the dot-com crash. The Shiller ratio looks at inflation-adjusted earnings over the past decade, and it can be a good indicator of how expensive stocks are right now.
In the past few years, the market has also been red hot. While the S&P 500 did well last year, that was actually a slowdown from previous years. In 2024, it rose by 23%, and the year before that, by 24%. That's three straight years of it outperforming its long-run average annual gain of around 10%.
A slowdown may be inevitable, and a fall to around 6,500 would represent a 5% decline. It's not a huge drop, but given market conditions and inflated valuations, I think it's a plausible and likely scenario.
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This doesn't mean it's time to get out of the market
Even if you are worried about a potential market decline this year, that doesn't mean selling all your stocks and going all-in on cash or gold is necessarily the solution. If you're a long-term investor, you can simply ride it out and hang on. The market can be unpredictable, and while conditions may look unfavorable right now, that can change quickly over the course of the year.
You can simply invest in stocks that carry below-average risk. Investing in dividend stocks or companies in stable industries, such as grocery stores, can provide a bit more safety. While there is no entirely risk-free stock to own, there are ways you can reduce your overall risk if you're worried about the broad market.
