The S&P 500 has spent much of the year under scrutiny as elevated valuations and signs of overextension fueled expectations of a market correction.
After the index broke through 7,000 for the first time and kept climbing to new records, those fears intensified across financial media.
The S&P 500 Shiller cyclically adjusted price-to-earnings (CAPE) ratio has climbed above 40 for only the second time in history, following the late-1990s tech boom, according to Robert Shiller’s dataset tracked at Multpl.
Bank of America’s July 2026 Global Fund Manager Survey found that 43% of global fund managers believe artificial intelligence (AI) stocks are in bubble territory, though a slightly larger share, 48%, said they are not, Seeking Alpha reported.
A new midyear equity analysis from Putnam Investments reframes the conversation around what extended rallies and periodic selloffs mean for your long-term returns.
S&P 500 earnings did the heavy lifting, not expanding valuations
One of the most persistent misconceptions about the current rally is that investors have simply been paying more for the same earnings.
The Putnam report challenges that view with a set of data points that are difficult to dismiss or explain away. Roughly a year ago, consensus estimates for S&P 500 earnings stood at about $265 a share.
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Those estimates have since risen to nearly $340, representing a jump of close to 30% in just over twelve months of revised forecasts.
During that same stretch, the index climbed from about 6,000 to more than 7,400 while the forward price-to-earnings multiple contracted.
Earnings growth, not speculative enthusiasm, has been the primary engine propelling this rally forward over the past year, the report concluded.
Historical S&P 500 drawdowns are the norm, not the exception
The fear that a sharp selloff will erase gains is understandable, but the historical record tells a very different story.
Over the past 75 years, the S&P 500’s average peak-to-trough intra-year pullback has been 13.7%, LPL Research found using Bloomberg data.
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Despite those regular declines, the index delivered an average annual price gain of 9.6% and posted positive returns in 74% of those years, according to LPL Research.
Adam Turnquist, chief technical strategist at LPL Financial, wrote that selloffs of this size are a routine feature of equity markets.
The index has spent nearly 70% of trading days in a drawdown of up to 5% on a calendar-year basis, the firm’s research showed.
The 1990s expansion offers a parallel for current AI-driven rally
Many investors reflexively compare the current AI-fueled market to the dot-com bubble, but most focus only on the eventual crash.
The Putnam report points instead to the years of powerful, sustained gains that preceded the late-1990s unraveling and puts them in context.
The S&P 500 generated a 430% total return during the decade, including five straight years of gains above 20%, Putnam noted.
The Cboe Volatility Index averaged in the low-to-mid-20s throughout the 1990s, well above the mid-teens average that has characterized the current decade, the Putnam analysis noted.
The AI rally may resemble the 1990s boom more than its crash, with history highlighting years of sustained market gains first.
Stepping aside to avoid short-term pain often costs more than the dip
The cost of moving to cash during volatile stretches has been quantified in analyses from firms including JPMorgan Asset Management.
JPMorgan Asset Management found that $10,000 invested in the S&P 500 at the start of 1995 would have grown to about $402,000 by 2023.
An investor who missed just the ten best trading days during that period would have finished with only $265,000, a 34% reduction.
Jack Manley, global market strategist at JPMorgan Asset Management, told CNBC in April 2026 that the firm’s data shows six of the market’s 10 best days over the past two decades occurred within two weeks of its 10 worst days.
“Now is still a good time to be taking risk, but realize it is going to be a choppy, bumpy ride over the course of this year,” Manley said.
The shortfall exists because the market’s strongest single-day gains tend to cluster tightly around its most volatile and unsettling stretches.
Putnam’s case for staying invested through 2026 swings
None of this guarantees a correction will not occur, and current valuations carry meaningful risk at these elevated levels.
The Putnam report acknowledges that the artificial intelligence investment cycle is making companies harder to value and that the road ahead will be uneven.
But the firm’s core argument holds: periodic volatility is not a credible reason to abandon a position in equities entirely, Shep Perkins, chief investment officer of Putnam Investments, wrote in the analysis.
Putnam’s report acknowledges that headlines and short-term swings will remain part of the road ahead in 2026.
The data from Putnam and LPL suggests that retreating to cash in response has historically done more damage than any individual drawdown.