US stock valuations under pressure and policy shifts: Integration and opportunities in 2026

Overvaluation Difficult to Sustain, S&P 500 Faces Adjustment Pressure

As of mid-November, the S&P 500 index has retreated from recent highs and is currently oscillating around the 50-day moving average, with short-term daily volatility noticeably increasing. More importantly, valuation levels warrant attention: the current forward P/E ratio of the S&P 500 is about 24x, exceeding the five-year average by over 15%, indicating that the premium for technology and artificial intelligence themes has become quite substantial.

Analysts point out that if the tech sector lacks new fundamental support in the short term, the index may consolidate within the 6,500 to 6,800 point range, forming a broader sideways pattern. This is not a sign of a crash but a necessary process for market digestion of previous gains and re-pricing.

Fed Policy Shift Becomes Key, Rate Risks Still Need Vigilance

Federal Reserve official Waller recently stated that a rate cut in December is reasonable from a policy perspective, but this does not eliminate market concerns about the policy direction in early 2026. In fact, the outlook for January 2026 remains highly uncertain, with official interest rate statements, economic data releases, and inflation trends all capable of triggering expectations reversals.

It is also worth noting that global inflation pressures have not fully eased. The recent rise in prices in the Philippines reflects resilience in emerging market inflation and suggests that the Fed’s future policy space may be limited. The trajectory of interest rates will directly impact the discount rates of high-valuation sectors like tech stocks, so investors should remain highly sensitive to official statements.

Momentum in Large-Cap Stocks Slows, Market Structure Risks Emerge

This year, the S&P 500 has gained about 12%, but the source of this rally is highly concentrated—over 70% of the total gain came from the top ten largest stocks, with tech giants like Nvidia, Microsoft, and Apple serving as core drivers. This “winner-takes-all” structure has temporarily boosted the index but also harbors risks.

If the momentum of these large-cap stocks slows or they undergo corrections, the overall market could lose its main support and enter a deeper consolidation phase. This explains why, despite increased volatility in individual stocks recently, the broader market has not shown significant declines—investors are still waiting for the next signals from these heavyweight stocks.

Capital Rotation Initiates, Diversification Becomes the New Norm

Since mid-November, market capital flows have shifted noticeably. From a concentrated allocation in technology and AI sectors, funds are beginning to diversify into value stocks (energy, industrials), defensive sectors (healthcare, utilities), and fixed income assets. This rotation is not accidental but a proactive adjustment by investors reassessing risks.

Meanwhile, gold, oil, and major foreign exchange assets have also absorbed some safe-haven capital. In comparison, the volatility of the S&P 500 during this period remains high, reflecting market caution about the future direction of US stocks. In the medium term, this diversification helps reduce extreme pullback risks but also further weakens the index’s upward momentum.

Valuation Reconciliation and Long-Term Opportunities Balance

Conservative scenarios suggest that the S&P 500 may oscillate or slowly rise within the 7,000 to 7,500 point range in the medium term. This is not a pessimistic outlook but a rational judgment that high-valuation sectors still require earnings validation.

Interestingly, optimistic voices still exist in the market. For example, Hudson Bay Capital once used a “sentiment disparity model” to estimate that in an extremely optimistic scenario, the S&P 500 could reach 25,000 points. However, such forecasts typically assume continued favorable policies, significant earnings improvements, and sustained high market sentiment—conditions that are difficult to fully realize in practice.

Three Decisive Factors for 2026

Looking ahead to next year, the performance of the S&P 500 will be dominated by three key variables:

First, earnings validation and momentum continuation in the tech sector. Whether AI themes can translate from concept to tangible revenue growth will determine the sustainability of these stocks’ valuations.

Second, bond yields and the Federal Reserve’s interest rate policy direction. As mentioned, the policy stance in early 2026 remains highly uncertain, directly affecting discount rates.

Third, capital rotation and market sentiment evolution. When funds spread from single themes to multiple sectors, the market’s overall risk resilience increases, but the upward drive of the index may slow.

Investment Advice: Diversify and Manage Risks

In this context, investors should consider adopting a diversified allocation strategy. Maintaining exposure to the tech sector is acceptable, but it should be complemented with value stocks, energy, defensive sectors, and fixed income assets. This is not about abandoning growth but acknowledging the risks of overvaluation and balancing returns with risk through structural diversification.

In short, the S&P 500 is shifting from a phase driven solely by technology themes to an ongoing consolidation supported by a broader range of sectors. This transition is challenging but also presents new opportunities—so long as investors can adapt to this changing rhythm.