The S&P 500 is currently sitting near 6,950, and honestly, if you’d told someone two years ago we’d be knocking on the door of 7,000 by January 2026, they’d probably have asked what you were smoking.
It’s been a wild ride.
We just came off a 2025 where the index climbed roughly 17%. Now, just a few weeks into the new year, everyone is asking the same thing: how is the s and p 500 doing and can this possibly keep going? The short answer is that the market is up about 1.3% to 2% year-to-date, depending on which day you catch the closing bell. It’s a positive start, but there’s a lot of "expensive" anxiety floating around trading desks right now.
The Reality of the 2026 Rally So Far
Most people look at the green numbers on their phone and think everything is perfect. It’s not that simple. While the index hit fresh all-time highs earlier this month—peaking around 6,986—the vibe is definitely more "cautious optimism" than "blind euphoria."
We aren't seeing the 25% explosions of 2024. Instead, Goldman Sachs and other big players like LPL Financial are calling for a more "normal" year. We're talking 10% to 12% total returns.
Why the cooldown? Basically, valuations are stretched. The price-to-earnings (P/E) ratio is hovering around 22.5 to 28, depending on if you're looking at trailing or forward earnings. To put that in perspective, the 10-year average is closer to 18.7. You've basically got a market that is "priced for perfection." If a big company misses an earnings report by even a penny, the sell-off is fast and it is brutal.
Who is actually carrying the weight?
For the last few years, it was all about the "Magnificent Seven." You know the names: Nvidia, Apple, Microsoft, the usual suspects. But something shifted as we entered 2026.
- Broadening is real: In 2025, the gap between the "Big Tech" stocks and the other 493 companies in the index started to shrink.
- The 493: Analysts at FactSet are actually predicting that the non-tech sectors will see earnings growth of about 12.5% this year.
- AI is maturing: We've moved past the "just buy anything with AI in the name" phase. Now, investors want to see actual revenue from AI.
Honestly, it's kinda refreshing to see sectors like Materials, Industrials, and Financials actually doing some of the heavy lifting for once.
How is the S&P 500 doing compared to historical "January Effects"?
There is this old Wall Street saying: "As goes January, so goes the year."
History is a bit messy here. According to data analyzed by The Motley Fool, when the S&P 500 is up between 0% and 2% in January—which is exactly where we are right now—the average annual return ends up being around 16%. That’s actually great.
But if January turns red? That's when people start sweating. In 2022, the index tanked 5.3% in January and finished the year down nearly 19%. So far, 2026 isn't showing those "crash" signals. We’ve had a few dips, like on January 14th when the index dropped about 0.5% after some lukewarm bank earnings, but the buyers stepped back in almost immediately.
The Fed factor
Jerome Powell and the Federal Reserve are still the main characters in this story. The market is banking on at least a couple of rate cuts this year. Lower rates usually mean higher stock prices because it’s cheaper for companies to borrow money to grow. If the Fed stays "higher for longer," that 7,000 target for the S&P 500 might stay out of reach for a while.
What's actually driving the price right now?
It's not just "vibes." There are specific economic engines under the hood.
- Earnings Growth: FactSet is projecting a 15% increase in earnings for S&P 500 companies this year. That is a massive number, well above the 8.6% long-term average.
- The "Tax Relief" Tailwind: There’s nearly $200 billion in tax relief hitting U.S. households this year. When people have extra cash, they spend it. When they spend it, S&P 500 companies (like Amazon or Walmart) make more money.
- Corporate Re-leveraging: After years of being stingy, companies are starting to borrow again to fund mergers and buybacks. This creates a "floor" for stock prices.
But let’s be real: the "AI Bubble" talk hasn't gone away. People like Peter Berezin at BCA Research are warning that the amount of money companies are spending on AI chips needs to start showing a massive return on investment (ROI) soon, or the tech sector might face a "reckoning."
Risks you shouldn't ignore
No expert worth their salt will tell you it's all sunshine. 2026 is a midterm election year in the U.S.
Historically, midterm years are bumpy. The S&P 500 usually sees a peak-to-trough decline of about 17% at some point during these years. That’s a lot of volatility. You’ve also got geopolitical tensions and a labor market that is "softening." If unemployment starts ticking up too fast, consumer spending—the heart of the U.S. economy—could skip a beat.
Actionable insights for your portfolio
If you're looking at the S&P 500 and wondering what to do with your own money, here is the breakdown of how to navigate this 2026 landscape:
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- Check your tech weight: If you’ve been riding the AI wave, you might be "overweight" in tech. Since the market is broadening, it might be time to look at Value ETFs or sectors like Healthcare and Industrials.
- Don't chase the highs: With the index near 7,000 and P/E ratios elevated, "buying the dip" is a much better strategy than buying when the news is nothing but "New Records!"
- Watch the $6,800 level: Technically, $6,800 has become a strong support level. If the index falls below that, it might trigger more selling. As long as we stay above it, the bull market is officially alive and well.
- Earnings season is king: Pay attention to the "Big Tech" guidance. We don't just care about what they made last quarter; we care about what they say they'll make in the next six months.
The S&P 500 is doing fine—actually, it's doing better than fine. But the "easy money" has likely been made. Now we’re in the "show me the money" phase of the bull market. Stay diversified, keep an eye on the Fed, and don't panic when the midterm election volatility inevitably shows up this summer.
To stay ahead, keep a close watch on the upcoming February 5th release of updated market statistics, which will give us a clearer picture of whether the "January Effect" is holding firm or if the market is cooling off for a spring correction.