S&P 500 Valuation Gap May be Set to Close in 2026

AI stocks’ earnings dominance has resulted in bloated multiples for S&P 500 tech, media and telecom (TMT) stocks, as investment dollars concentrated in the strongest growth opportunities in the index.  However, the analyst consensus sees a more normalized environment for earnings emerging with policy support in 2026. This closing of the earnings gap between TMT and the rest may result in closing of the valuation gap as well.  

The S&P 500 is trading at 22.4x forward earnings, a level last recorded in November 2020, but this optimistic tone is far from evenly distributed through the market. TMT multiples touched 27.9x in October, surpassing their 2021 high, while ex-TMT is still trading at multiples near 5-year average. This valuation gap could be in part explained by an earnings gap, as investment concentrated on the strongest growers in the index.  Growth in TMT earnings averaged more than 20% since 2023, about four times the average growth of the rest of the S&P 500. Over the long term, TMT earnings have averaged about 4 percentage points more than the rest of the index.

The analyst consensus sees the growth gap between TMT and the rest as likely to move closer to those norms in the year ahead, and this may result in some closing of the valuation gap.  Earnings for TMT should still grow faster than the rest, according to consensus, but not 4 times as fast.  For 2026 and 2027, TMT may post average earnings growth of about 18% while the rest may manage 11% growth.

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