The stock market had a choppy year, marked by surprise gains and losses. Despite the unexpected challenges, including the tariffs declared by President Donald Trump, the longest U.S. government shutdown in history, and lingering concerns about an AI bubble.
The S & P 500(^GSPC) posted a return of 17.83% Year-to-date (YTD). That being said, 2025 was a year when the movements of stock markets were defined by AI. The AI-linked stocks posted strong gains with NVIDIA Corporation (NVDA), Microsoft Corporation (MSFT), Alphabet Inc. (GOOG), and Advanced Micro Devices, Inc. (AMD) up 41.88 %, 15.71%, 65.39 %, and 76.9% year-to-date, respectively.
Yet back in September, Federal Reserve Chair, Mr. Jerome Powell, observed that “By many measures… equity prices are fairly highly valued.”
The observation suggests that the stock prices appear expensive compared to historical benchmarks such as earnings, cash flows, or interest rates. The traders have already priced in strong growth and optimism around the macroeconomy, leaving less room for further upside.
Furthermore, minutes of the Federal Open Market Committee (FOMC), October 28-29, 2025, reflected similar concerns from policymakers. The minutes noted, “Some participants commented on stretched asset valuations in financial markets, with several of these participants highlighting the possibility of a disorderly fall in equity prices, especially in the event of an abrupt reassessment of the possibilities of AI-related technology.”
The statement is interpreted as a warning about the overvaluation of tech stocks. The market may face a sharp decline if the optimism about Artificial Intelligence suddenly changes.
Moreover, as of December 2025, the Shiller P/E (CAPE Ratio) is around 39 to 40. The historical long-term average Shiller P/E (CAPE Ratio) for the S&P 500 is around 16-18. A record high ratio of 44.19 was recorded in December 1999 during the Dot-com bubble peak, and a record Low was 4.78 (Dec 1920) in the deep bear market era.
Over the past five years, the Shiller P/E (CAPE Ratio) kept rising, the only exception being in 2023 when the ratio decreased to 28.34, only to rebound in the very next year. The current 40.74 is higher than the historical averages, but close to extremes seen during major market peaks. The data indicate that the equities are overvalued with risks of higher volatility and lower future returns. The following table suggests the historical Shiller P/E (CAPE Ratio) from 2020 to 2025.
| Date | Shiller P/E (CAPE Ratio) Value |
|---|---|
| Dec 26, 2025 | 40.74 |
| Jan 1, 2025 | 37.14 |
| Jan 1, 2024 | 31.97 |
| Jan 1, 2023 | 28.34 |
| Jan 1, 2022 | 36.94 |
| Jan 1, 2021 | 34.51 |
| Jan 1, 2020 | 30.99 |
Furthermore, according to Yale School of Management Insights (Jeffrey A. Sonnenfeld & Stephen Henriques, Oct 8, 2025), the complex web of investment and partnerships in the AI sector may signal overinvestment and valuation risk that could contribute to a market correction.
While concerns about an AI bubble remain, industry leaders like AMD CEO Lisa see the current phase as an AI super cycle with long-term growth and transformative potential.
JPMorgan’s Outlook for 2026 Remains Positive
Despite the concerns and caution, JP Morgan suggests a positive market outlook for 2026.
In the report titled ‘2026 market outlook: A multidimensional polarization’, noted that “J.P. Morgan Global Research is positive on global equities for 2026, forecasting double-digit gains across both developed markets (DM) and emerging markets (EM).”
The report also added, “Looking at the economy, J.P. Morgan Global Research forecasts a 35% probability of a U.S. and global recession in 2026, and sticky inflation will likely remain a prevailing theme.”
