Due to significant trends like artificial intelligence (AI), the stock market might experience another positive year in 2026.
The S&P 500, which encompasses 500 companies across 11 different sectors, is heavily influenced by larger firms, with AI leaders such as Nvidia and Alphabet playing a pivotal role in its performance.
Recently, the S&P 500 reached a new peak, bolstered by a 16% rise so far in 2025. This growth considerably surpasses the average annual return since the index’s inception in 1957. It’s worth noting that recent years have seen accelerating returns as AI drives remarkable expansion in the semiconductor, software, and cloud computing domains, and this momentum seems poised to continue.
The Vanguard S&P 500 ETF is a low-cost option designed to mimic the S&P 500’s performance. So, is it wise for investors to jump in at an all-time high? History gives us some clues.
Healthy diversification with high exposure to technology and AI
Within the S&P 500, Information Technology represents the largest sector at 36.1%. It’s home to three major players: Nvidia, Microsoft, and Apple, which collectively boast a staggering market capitalization of $11.9 trillion. This emphasizes their significant influence on the index. These companies are leading the charge in the AI revolution.
Since the AI surge began earlier in 2023, the S&P 500 has seen a remarkable 78% increase. When isolating the tech sector, however, that number drops to just 52%, underscoring its critical role.
The financial sector, where Berkshire Hathaway resides alongside giant investment banks like JP Morgan Chase and payment leaders Visa and Mastercard, is the second largest, at 12.9%. Meanwhile, consumer discretionary is third at 10.5%, driven by tech-savvy giants like Amazon and Tesla. Following closely is the communications sector at 10.1%, with other influential AI firms like Meta Platforms and Alphabet.
The remaining sectors in the S&P 500, which include healthcare, industrials, consumer staples, energy, utilities, real estate, and materials, provide a good level of diversification.
Investing in the Vanguard S&P 500 ETF offers an incredibly low expense ratio of 0.03%, meaning that a $10,000 investment incurs only $3 in annual fees. For comparison, similar ETFs typically charge about 24 times more, averaging 0.73% in expenses.
There’s rarely a bad time to invest
While previous performance isn’t always a reliable forecast for future results, the S&P 500 has delivered an impressive long-term average return of 10.5% annually since its establishment in 1957. However, it’s essential to recognize that fluctuations, corrections, and bear markets are just part of the investment landscape.
Interestingly, the S&P 500 often dips at least 5% annually, and a drop of 10% or more happens roughly every two and a half years. Bear markets, defined by a 20% or more decline, occur about every six years. The most recent bear market was in 2022, suggesting that investors may experience more years of positive returns before facing the next significant downturn.
Additionally, several strong factors could support ongoing growth. First, the AI boom is likely to usher in trillions in value, and secondly, the Federal Reserve’s gradual interest rate reductions should generally benefit corporate earnings.
That said, the S&P 500’s current valuation is historically high, potentially increasing the short-term risk of a market correction. This doesn’t necessarily mean shying away from the Vanguard S&P 500 ETF. Starting with a small investment and gradually increasing it over time could be a prudent approach, allowing you to lower your average cost even if the index takes a sudden dip.
