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The S&P 500 is the most popular stock market index around the globe. Representing the 500 largest companies in the world’s largest economy, tracker funds following the leading US benchmark are staple investments in many British investors’ portfolios.
In eight out of the last 10 years, the S&P 500 produced a positive return. Last year was another success story, despite President Trump’s tariff measures and global conflicts. But are US stocks poised for a crash in 2026? Here’s my take.
Warning signs
Every year, scores of analysts and commentators prophesise about an imminent stock market crash. Equally, many counter the doomsayers with bullish forecasts of glorious gains. The truth is, nobody knows what will happen for sure.
However, we can compare where we are today with previous periods in history and draw inferences accordingly. Worryingly, there are some red flags for S&P 500 stocks as we enter the new year.
One is the Shiller price-to-earnings (P/E) ratio. This valuation metric divides the current S&P 500 price by the average of the last 10 years of inflation-adjusted earnings.
Currently, it’s at 40.74. To put that number in context, that’s the second-highest level in history, surpassed only by the dot-com bubble. Many fear that an artificial intelligence (AI) bubble is inflating in today’s stock market. When bubbles pop, the subsequent crash can be devastating.
Capital expenditure on AI by S&P 500 companies totalled around $400bn in 2025. This year’s estimates are over $500bn. If sentiment shifts, 2026 could prove to be very painful for investors in US shares.
Reasons to be optimistic
Drawing parallels with the late 90s is tempting, but there are crucial differences between the S&P 500 then and today. Back in the dot-com era, many tech stocks lacked profits and robust cash flows. The rapid share price increases were often driven by speculative frenzy.
Arguably, today’s mega-cap tech firms are in much better shape. They’re highly profitable businesses with strong fundamentals across a range of metrics.
AI potential might be driving share prices higher, but concrete earnings can justify the excitement. Those expecting an S&P 500 crash this year may well find their fears are unfounded.
An undervalued Magnificent 7 stock
A full-blown crash is a possibility, but I err on the side of optimism. After all, the great Benjamin Graham said: “To be an investor, you must be a believer in a better tomorrow“.
But, I’m conscious of overvaluation, too. That’s why I recently invested in Meta Platforms (NASDAQ:META), the owner of Facebook, Instagram, and WhatsApp.
With a forward P/E multiple around 22.2, Meta’s the cheapest of the Magnificent 7 club on this metric. I think the stock could shine this year, provided the whole market doesn’t crash.
Third-quarter earnings were impressive, with revenue rising 26% to $51bn and daily users increasing by 8% to 3.54bn. Precision-targeted advertising continues to be a cash machine for the company and the width of its moat in the social media world can’t be overstated.
Regulation is a growing risk for the company. Australia’s social media ban for under-16s could inspire other countries to follow suit, which could hurt the Meta share price.
Nonetheless, I think Mark Zuckerberg is one of the most talented and competitive S&P 500 CEOs. At today’s price, Meta could be a long-term outperformer.
