(The opinions expressed here are those of the author, a columnist for Reuters)

ORLANDO, Florida - The new year has gotten off to a roaring start for U.S. equities, with the S&P 500 and Dow Jones breaking new records, ‍and investors are anticipating a fourth ‍consecutive year of double-digit returns. But elevated valuations could yet spoil the party.

The optimism is palpable, and why not? The artificial intelligence capex boom is accelerating, ​the Federal Reserve is on track to lower interest rates further, and a fiscal stimulus bonanza is coming down the pike - all while economic activity and earnings growth continue to hum along ⁠nicely.

Little wonder then that analysts expect the S&P 500 to deliver near 10% returns in 2026, even after three consecutive years of double-digit gains have lifted the index by a cumulative 80%. The ⁠more ‌bullish year-end forecasts of 8,000 and above imply at least 15% upside.

The most compelling counter-argument to this bullish consensus, however, is perhaps the most obvious: valuations.

The best indicator of where an index will be at the end of the year relative to expectations and its peers remains its starting point. ⁠There will always be exceptions, of course, but relatively cheap markets on January 1 tend to perform better by December 31. And vice versa.

This should give Wall Street bulls some pause.

U.S. DISCONNECT

The S&P 500 rose 16% in 2025. That is pretty impressive given the tariff tumult in the first half of the year and the index's 24% and 23% gains in the previous two calendar years.

But on a global level, it was a relatively poor showing.

Analysts at Deutsche Bank note that ⁠in a sample of 47 global indices, there was a "notable" ​relationship last year between annual returns in U.S. dollars and starting valuations. Markets that began the year with lower 12-month forward price-to-earnings ratios generally performed better.

U.S. stocks, which started the year with the highest 12-month forward P/E ‍of 25, came in 37th place by Deutsche's calculations.

Indian and Danish stocks were the next most expensive markets on January 1 last year, and they both underperformed. Danish stocks were the weakest of all, with India's market coming ​in sixth from the bottom, despite the country boasting one of the world's fastest economic growth rates.

At the other end of the spectrum, Colombian stocks were the cheapest at the start of the year and ended up returning the most.

MIND THE GAP

Of course, U.S. equity valuations are so high largely because Wall Street has outperformed its global peers for most of this century.

But could the tide now be turning?

According to strategists at Goldman Sachs, last year was the first in 15 that U.S. stocks lagged behind Asia, Europe, and emerging markets indices.

Goldman's view that U.S. stocks will continue to underperform over the next decade has stirred up some debate, although not as much as the claim by Apollo Global Management's Torsten Slok that the S&P 500's annualized returns over the next decade could be zero.

To be sure, Wall Street has proven the naysayers wrong for a long time, delivering strong returns despite high valuations. But as Deutsche Bank's team argues, this is the exception, not the rule.

"Even if U.S. equities were to defy valuation gravity once more amid today's AI-driven optimism, the ⁠weight of evidence across economies and centuries remains clear: valuations matter," Deutsche Bank analysts wrote in a study ‌published in October.

Investors should keep this in mind. U.S. equity valuations are currently high by historical standards, both nominally and relative to their European, Asian and emerging-market peers, in large part thanks to the boom in AI-related stocks.

This suggests that Wall Street could find itself near the back of the global pack for a second consecutive year.

(The opinions expressed here are ‌those of the author, ⁠a columnist for Reuters)

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(By Jamie McGeever; Editing by Marguerita Choy)