The Stock Market Is Too Expensive—and Could Very Well Stay That Way in 2026

Traders work on the floor of the New York Stock Exchange on Dec. 2. (Spencer Platt/Getty Images)

Investors staying out of the market because “stocks are too expensive” might have to deal with a harsh reality in 2026. Things might just stay that way.

The S&P 500 currently trades at 22 times next year’s earnings per share estimates, according to FactSet data. To put it bluntly, that is expensive. It’s well above the 10-year average of 19.1 and the average of 16.9 since 2000.

But many Wall Street strategists believe high valuations are likely here to stay. With S&P 500 year-end targets ranging from 7100 to 8000, most argue valuations will likely remain at current levels, if not extend further.

“We expect equity valuations to remain elevated,” writes Binky Chadha. Deutsche Bank chief U.S. equity and global strategist

Chadha holds the most bullish call on the S&P 500 next year with a year-end target of 8000. Among other factors, Chadha argues falling inflation and robust earnings growth of 14% for the benchmark index “easily explain the rise in multiples and indeed argue they are likely to push higher.”

Morgan Stanley chief investment officer Mike Wilson has similar reasons for why the S&P 500 will trade at 22 times 2027’s earnings and hit 7800 by the end of next year. Wilson’s work shows that when S&P 500 earnings growth is above average and the Federal Reserve is cutting interest rates, valuations typically expand.

“In this regard, one could argue we are being conservative in our forecast for modest multiple compression at the index level, though we are also giving some weight to the extended nature of absolute valuation levels in this expectation,” Wilson writes.

Valuations remaining extended wouldn’t be unprecedented. The S&P 500’s forward 12-month price-to-earnings ratio peaked at nearly 26 in early 2000 before the burst of the dot-com bubble. But strategists often remind investors that valuations don’t often contract without a key catalyst.

Falling inflation, further Federal Reserve easing, and strong earnings growth are among the main reasons Wall Street argues valuations will remain higher. This means if any of those factors miss the mark, it could send stock multiples lower.

Bank of America head of U.S. equity and quantitative strategy Savita Subramanian tells Barron’s the increased use of leverage from hyperscalers in the AI buildout could lead to multiple compression. Looking through history, Subramanian found that when leverage increases, earnings volatility and the risk of corporate profits disappointing also swell up.

“We think that that is one of the one of the components of the equity market that looks less good going into 2026 than what we’ve enjoyed over the last several years, which is a very healthy balance sheet sector especially technology stocks, which used to have, a healthy amount of net cash,” Subramanian says.

Subramanian sees the S&P 500 increasing just 5% over the next year to 7100 as multiples compress by 5-10%. But even Subramanian’s call includes a projection for double-digit earnings growth.

DataTrek co-founder Nicholas Colas points out that at these levels, valuations are simply pricing in a very optimistic outlook for stocks that includes “zero odds of a recession in the next 24 months” and accelerating earnings growth for both 2026 and 2027.

“The bull case for U.S. large-caps is entirely based on investors being willing to pay either near- or above-record valuations over the next 12—24 months,” Colas writes. “Equities are always a game best suited to optimists, and especially so now.”

This presents an incoming investment year where optimism is the consensus and anything that dents such a narrative will likely drive valuations, and the overall market, lower.

Investors don’t need to look further back than last April, when the S&P 500 hit its lowest valuation in more than a year to remember how quickly that unraveling could happen.

Josh Schafer is the newsletter editor at Barron’s Investor Circle. His weekly View From the Circle column breaks down the latest macro trends moving markets and dives deeper into Barron’s stock picks.