The Vanguard S&P 500 ETF has solidified its position as the largest exchange-traded fund worldwide, largely driven by a multiyear surge in mega-cap growth stocks. As of January 29, 2026, the S&P 500 index has demonstrated impressive total returns, yielding a remarkable 90% since the beginning of 2023. This rally has been spearheaded by the “Magnificent Seven” technology stocks and bolstered by the rapid advancements in artificial intelligence, positioning U.S. large-cap stocks among the top performers in the global equity landscape.
Despite these strong returns, there are complexities in evaluating the attractiveness of the S&P 500 as its price-to-earnings (P/E) ratio, currently resting at 28, suggests elevated valuations. This figure is among the highest in over a century, raising questions about sustainability going forward.
Several key factors indicate that the index may continue on its upward trajectory into 2026. Firstly, earnings prospects remain optimistic. According to data from FactSet, S&P 500 companies are projected to report a year-over-year earnings growth of 12.4% for 2025, with further growth anticipated at 14.7% for 2026. Revenue growth is also positive, expected to reach 7.2% in 2025 and 7.3% in 2026. These indicators suggest that the strong performance should persist, although a broader recovery across various sectors would be desirable to support ongoing gains.
Valuations, though high, can remain elevated for a sustained period as long as growth narratives prevail. If inflation is kept in check and the labor market remains stable, investors may not feel compelled to push valuations back down. Under these circumstances, a P/E ratio that holds steady while earnings grow could yield returns of around 15% for the S&P 500.
Moreover, in times of market uncertainty, quality stocks often draw investor attention. Companies within the “Magnificent Seven,” known for their robust cash flows and balance sheets, may provide a safety net should market conditions deteriorate. Their ongoing investments in AI are expected to continue fueling revenue and earnings growth.
Furthermore, the Federal Reserve’s possible path of interest rate cuts could also serve as a positive catalyst for U.S. stock performance. While the Fed’s rate-cutting plans remain speculative, even modest reductions could offer tailwinds for the markets.
Investing in the S&P 500 through the Vanguard ETF undoubtedly carries risks, including high concentration and geopolitical tensions. Nonetheless, if the prevailing outlook remains one of economic stability without recession fears, the S&P 500 still presents a compelling investment opportunity. With GDP growth hovering around 4% and unemployment rates remaining historically low, these factors bode well for further gains in the index.
While potential investors might consider diversifying into other promising stocks, especially given recent guidance from analysts highlighting alternative investment opportunities, the Vanguard S&P 500 ETF holds a strong case for those looking to leverage the benefits of large-cap stock investments.