Is VOO Still a Compelling Buy in 2026? Assessing Passive Investing in a High-Valuation Market

The Vanguard S&P 500 ETF (VOO) has long been a cornerstone of passive investing, offering exposure to the broad U.S. equity market with low fees and diversification. Yet as 2026 approaches, investors face a critical question: Is VOO still a compelling buy in a market environment where valuations appear stretched? To answer this, we must dissect the current valuation metrics of the S&P 500, contextualize them against historical benchmarks, and evaluate the implications for long-term investors.

Valuation Metrics: A Tale of Two Ratios

As of December 2025, the S&P 500's trailing P/E ratio stands at 28.5, while its forward P/E ratio hovers around 22.41–23.88. These figures exceed the 10-year historical average of 18.6 for the forward P/E, suggesting the market is priced for continued earnings growth. Meanwhile, the P/E10 (Cyclically Adjusted P/E) ratio-a long-term valuation metric that smooths out earnings volatility by averaging inflation-adjusted earnings over the past decade-has surged to 39.8. This is significantly above its historical average of 17.7, placing the market in territory last seen during the dot-com bubble and the 1929 crash.

Historical Precedents and Mixed Outcomes

High valuations often signal caution, but history shows no deterministic link between elevated metrics and poor returns. For instance, when the S&P 500 traded at a forward P/E of 22.9 in recent years-well above its 10-year average-it still delivered nearly double returns over five years due to robust earnings growth. Conversely, periods with P/E ratios above 23x have historically delivered negative or modest inflation-adjusted returns over 10 years. The CAPE ratio's current level of 39.8, while extreme, has not always guaranteed poor outcomes: In 2025, a CAPE of 37.14 coincided with a 17.9% annual return, underscoring the market's capacity to defy expectations when earnings growth outpaces pessimism.

The 2026 Outlook: Earnings Growth as the Wild Card

Goldman Sachs Research forecasts a 12% total return for the S&P 500 in 2026, driven by a projected 12% increase in earnings per share (EPS) for the year. Analysts anticipate 2026 EPS to reach $304.88, up from $268.30 in 2025, reflecting confidence in AI-driven productivity gains and macroeconomic resilience. However, these projections hinge on earnings growth outpacing expectations. If companies fail to deliver, the elevated forward P/E of 22.41 could signal underperformance.

Long-Term Passive Investing: Risks and Resilience

For passive investors, the key question is whether the S&P 500's historical resilience justifies holding VOO despite high valuations. Historically, periods with CAPE ratios above 35 have delivered subpar 15–20 year returns. For example, when CAPE exceeded 26.4, real 10-year returns averaged just 0.9%, barely outperforming risk-free assets. Yet the S&P 500's long-term trajectory has been shaped by structural innovations-from the rise of the internet to the proliferation of artificial intelligence-that can justify premium valuations if they unlock durable earnings growth.

Conclusion: A Calculated Bet for the Long-Term

VOO remains a compelling option for passive investors with a multi-decade horizon, but its appeal is tempered by the risks of overvaluation. The S&P 500's current P/E10 of 39.8 and forward P/E of 22.41 suggest the market is pricing in strong future growth. Whether this growth materializes will depend on macroeconomic stability, corporate innovation, and the ability of companies to adapt to shifting demand. For investors who can tolerate short-term volatility and prioritize long-term compounding, VOO's low cost and broad diversification still make it a viable core holding. However, those with shorter time horizons or risk aversion may want to complement it with alternative assets or defensive sectors to mitigate potential downside.