AI stocks are pushing valuations to historical levels

After a brutal 2022, the S&P 500 (^GSPC +0.59%) surged 24% in 2023, 23% in 2024, and roughly 16% in 2025. The technology-heavy Nasdaq Composite (^IXIC +0.64%) performed even better, gaining 43%, 29%, and 20%, respectively. Both indexes have climbed in 2026, extending a rally fueled mostly by enthusiasm surrounding artificial intelligence (AI).

There's a catch to all of this. A good portion of the market's appreciation is concentrated in a relatively small group of technology companies. This raises an uncomfortable question: Are investors witnessing a sustainable technological revolution or is another stock market bubble brewing?

Thankfully, Warren Buffett spent his career explaining how everyday investors can navigate situations exactly like this.

The so-called "Ten Titans" — Nvidia, Apple, Alphabet, Microsoft, Amazon, Tesla, Meta Platforms, Broadcom, Oracle, and Netflix — are a group of megacap technology and AI-related companies. Taken together, this cohort is increasingly becoming an influential force in the S&P 500. Although this basket of stocks has driven spectacular returns, it also means weakness among a handful of giant companies could weigh heavily on the broader market during a downturn.

Meanwhile, the Shiller CAPE ratio is flashing a warning investors should not ignore. CAPE, short for cyclically adjusted price-to-earnings, measures the S&P 500's price relative to its average inflation-adjusted earnings over the last 10 years. Unlike conventional price-to-earnings (P/E) ratios, CAPE readings smooth out short-term fluctuations in profitability.

S&P 500 Shiller CAPE Ratio data by YCharts.

Historically, the CAPE ratio averaged around 17. Today, CAPE readings hover around 41, a level approached or exceeded in only a handful of periods, most notably during the dot-com bubble. Elevated CAPE readings do not guarantee a stock market crash is imminent. However, they do suggest investors are paying historically higher prices for earnings, potentially limiting future returns.

During his tenure as CEO of Berkshire Hathaway, Buffett spent countless hours warning investors against confusing rising stock prices with attractive valuations. The Oracle of Omaha, as he is also known, famously observed, "Price is what you pay; value is what you get."

Buffett also recognized that most investors shouldn't spend too much time trying to determine which specific stocks are overpriced or when the next correction will arrive. Instead, he favors a much simpler solution: owning a low-cost S&P 500 index fund. In Berkshire Hathaway's 2013 shareholder letter, Buffett detailed that his instructions for his wife's trust called for 90% of the money to be invested in a low-cost S&P 500 index fund, specifically suggesting Vanguard.

Buffett actually put that philosophy into practice. In late 2019, Berkshire purchased 43,000 shares of the Vanguard S&P 500 ETF (VOO +0.61%). The investment conglomerate maintained that position for roughly five years — through the pandemic, the 2022 bear market, and the beginning of the AI boom. With an annual expense ratio of just 0.03%, investors pay just $3 for every $10,000 invested.

What makes Buffett's philosophy so valuable is understanding the S&P 500 has survived the dot-com collapse, the 2008 financial crisis, the COVID-19 crash, and countless recessions — all of which are illustrated below by the grey-shaded columns. Despite these setbacks, the S&P 500 has generated a 10% annualized return between 1928 and 2025.

This doesn't mean the VOO ETF is immune to an AI bubble bursting event. But unlike investing in one specific AI stock, owning the Vanguard S&P 500 ETF diversifies your capital across hundreds of businesses with different products, customer demographics, and growth drivers. It also provides exposure to established companies with experienced management teams, strong balance sheets, and the ability to adapt to changing economic conditions.

AI enthusiasm is pushing valuations into historically expensive territory, making a correction entirely possible. Even so, Buffett makes it clear that timing the next bubble matters far less than owning diversified, high-quality businesses for decades. For investors with a long-term time horizon, the Vanguard S&P 500 ETF remains a compelling investment regardless of what happens next with AI.

@moneyballinvestStocks MentionedVanguard S&P 500 ETFNYSEMKT: VOO$715.59(+0.61%)+$4.31Motley Fool Stock Advisor’s Latest PickGet Access—% Avg ReturnS&P 500 IndexSNPINDEX: ^GSPC$7,811.54(+0.59%)+$46.18NASDAQ Composite IndexNASDAQINDEX: ^IXIC$27,366.17(+0.64%)+$172.83Berkshire HathawayNYSE: BRKA$774,295.00(+0.97%)+$7,413.03Meta PlatformsNASDAQ: META$718.67(-0.31%)-$2.22NetflixNASDAQ: NFLX$70.30(-1.77%)-$1.27MicrosoftNASDAQ: MSFT$535.07(+2.38%)+$12.46AlphabetNASDAQ: GOOGL$351.66(+0.97%)+$3.37AppleNASDAQ: AAPL$336.64(-1.11%)-$3.78TeslaNASDAQ: TSLA$382.70(+2.05%)+$7.70AmazonNASDAQ: AMZN$262.43(+3.29%)+$8.37Berkshire HathawayNYSE: BRKB$515.62(+0.89%)+$4.57NvidiaNASDAQ: NVDA$229.28(-0.52%)-$1.20OracleNYSE: ORCL$141.40(+4.59%)+$6.21BroadcomNASDAQ: AVGO$361.54(+0.39%)+$1.40AlphabetNASDAQ: GOOG$347.86(+0.87%)+$3.00*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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