Dear traders, dear stock market friends.
In the past trading week, the S&P 500 was still in vacation mode and trading volumes were extremely low. After the index reached another all-time high on Christmas Eve and successfully ended the year 2025, a moderate correction of around one percent followed last week. The focus is now turning to the new year and the question of whether the S&P 500 can go one better despite its already high valuation and strong performance in recent years, or whether the risk of a major correction has increased.
S&P 500 posts double-digit gains for the third year in a row
With a closing price of 6845.50 points, the S&P 500 ended 2025 with a gain of 964 points or +16.4 %. All in all, 2025 was a strong year for equities, and clearly above the long-term average: historically, the average annual return of the S&P 500 (since 1957) is around 10.6% p.a. At +16.4%, the market has clearly exceeded this „normal value“.
At the same time, 2025 was not an exceptional year like 2023 or 2024, but rather a kind of normalization at a high level: After price increases of more than 20 % in the previous years 2023 and 2024, the increase in 2025 was lower, but remained comfortably in double digits. (If dividends are included, the total return for 2025 is even just under +17.9%).
Nevertheless, there were a few records:
- The S&P 500 reached 39 new record highs in 2025. (However, this number is not unusually high).
- And symbolically important: On December 24, 2025, the index reached its all-time high at a closing price of 6,932.05 points, followed by an intraday all-time high of 6,945.77 points on December 26.
- Although this fell just short of the magic 7,000 mark, the market visibly "docked at the top" at the turn of the year.
- To put this into perspective: It is historically rather rare for the S&P 500 to post double-digit gains for three years in a row (2023-2025). It is only the sixth time since the 1940s that this feat has been achieved. And this also explains the big macro question that directly resonates in 2026: Can the market continue the streak, despite already high valuations and a strong AI/mega-cap weight?
All 11 market sectors of the S&P 500 up
The S&P 500 can be divided into 11 market sectors. An ETF is available for each of these sectors, which can be used for both investment and analysis. Below we compare the performance of the individual market sectors with the S&P 500 ETF (SPY) over the last 52 trading weeks, more precisely from January 02, 2025 to January 02, 2026:
- The SPY rose 18.23 %.
- All 11 market sectors are up.
- The Technology (+25.19%), Industrials (+21.97%) and Communication Services (+21.63%) sectors were particularly strong. These three market sectors are offensive or pro-cyclical sectors. Only Consumer Discretionary, another important offensive sector, was weaker than the index.
- The three most important defensive sectors (Consumer Staples, Health Care and Utilities) were also strong, but underperformed the index and in particular the offensive market sectors.
The bottom line is that the offensive market sectors led the way last year and the defensive sectors showed relative weakness. The relative performance of the individual sectors compared to the SPY becomes particularly clear when we visualize the outperformance/underperformance on a relative level with a performance chart.
This is exactly the kind of development we want to see in a healthy bull market (outperformance of offensive sectors, underperformance of defensive sectors). As long as nothing changes in this picture and the pro-cyclical sectors continue to lead the way, the long-term uptrend should not be in danger.
Profit growth at record level
Social networks are currently full of posts pointing out the high valuation of the stock market and the S&P 500 and warning of a stronger correction as a result.
While a correction of +/- 10 % is certainly possible at any time and is historically the rule rather than the exception, one must not forget that the high valuation is not just pure hype based on fantasy, but is supported by real earnings growth.
It is also worth taking a sober look at the valuation figures: Depending on the definition, the current P/E ratio of the S&P 500 (trailing, last 12 months) is around 31, which seems high at first glance. However, if you look at the forward P/E ratio (earnings over the next 12 months), which is often more important in practice, the market currently stands at around 22, which is also above the historical average range: FactSet puts the 10-year average forward P/E roughly at 18.6 (5-year average around 19.9).
However, it is crucial that this valuation is not viewed in isolation, but in relation to the companies' earnings growth: For 2025, the expected earnings growth of the S&P 500 is around +12% according to the FactSet consensus, and for 2026, the current forecast is even around +15%; both clearly above the long-term earnings growth average.
This is precisely why the market can remain stable despite ambitious multiples: as long as companies deliver (and there are no surprising headwinds from inflation/interest rates), an expensive market is not automatically an overheated market. The risk only arises when expectations become too high and reality no longer catches up with them.
Author: Tobias Schmid
Date: 05.01.2026
