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Several catalysts, including the artificial intelligence infrastructure build‑out, have lifted the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to record highs.
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One of Wall Street’s most time‑tested valuation tools sounds the alarm.
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If a bear market takes shape, it will mark an incredible opportunity for long‑term investors to pounce.
- 10 stocks we like better than S&P 500 Index ›
- The artificial intelligence infrastructure build‑out
- Considerably better‑than‑expected corporate earnings
- Record share repurchases by S&P 500 companies
- History‑making initial public offering activity
- January 1999 to September 2000: The Shiller P/E reached its record high of 44.19 in December 1999, mere months before the dot‑com bubble officially burst. After spending the bulk of two years with a Shiller P/E above 40, the S&P 500 and Nasdaq Composite lost 49% and 78% of their values by October 2002, respectively.
- January 2022: For only a few days during the first week of 2022, the S&P 500’s CAPE Ratio exceeded 40. Short thereafter, the 2022 bear market shaped as, ultimately wiping away a fifth, a quarter, and a third of the Dow’s, S&P 500’s, and Nasdaq’s respectivevalues over nine months.
- May 2026 to present: Though the Shiller P/E briefly priced above 40 several times last year and earlier this year, it has remained consistently above this mark since May 2026.
Key Points
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Key Points
For the better part of the last four years, Wall Street’s bull market has been unstoppable. Aside from the short‑lived tariff tantrum in April 2025 and a brief pullback associated with the Iran war earlier this year, the time‑tested Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and tech‑focused Nasdaq Composite (NASDAQINDEX:^IXIC) have all blasted to several record highs this year.
Catalysts have been abundant and include (but aren’t limited to):
Missed AI’s “Act 1”? Act 2 Could Be 15× Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. According to analysts, we’re only at the end of “Act 1”—the R&D phase. “Act 2” is the global rollout. Continue »
While more than a century of history has decisively shown that Wall Street’s major stock indexes rise over extended periods, things may not be as ideal as the Dow, S&P 500, and Nasdaq Composite make them appear.
Image source: Getty Images.
Currently, we’re witnessing the stock market do something that’s only been accomplished three times over the last 156 years. When this signal appears, it has consistently foretelling significant declines to come for Wall Street.
Stock valuations have reached rarified territory
Make no mistake about it, headwinds threaten to end Wall Street’s bull market, such as rapidly rising margin debt and the potential for an extended Fed rate‑hiking cycle. But if history repeats, it’s premium stock valuations that offer the direst outlook for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.
To be upfront, “valuation” is a tricky subject. Without a one‑size‑fits‑all blueprint for evaluating and valuing individual companies or the broader market, it’s not uncommon for emotions or subjectivity to factor into the equation. Subjectivity and emotion are what make it virtually impossible to accurately forecast short‑term directional moves in individual stocks or major stock indexes.
There is, however, one valuation tool that, when backtested, has demonstrated an uncanny ability to forecast the future for Wall Street’s major indexes. I’m talking about the S&P 500’s Shiller Price‑to‑Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).
Stock Market Shiller PE Ratio on the verge of taking out its Dot Com Bubble all‑time high pic.twitter.com/CtCmSgWnLt
— Barchart (@Barchart) July 11, 2026
Economists introduced the CAPE Ratio in the late 1980s and have back‑tested it as far back as January 1871. Over this roughly 156‑year stretch, the average multiple rests near 17.4. As of the closing bell on Sept. 21, the S&P 500’s CAPE Ratio clocked in at 41.6.
Including the present, there have only been three times, spanning 156 years, in which the S&P 500’s Shiller P/E Ratio has topped 40 – and both previous occurrences were followed by notable bear markets:
History doesn’t mince its words: Premium stock valuations aren’t well‑tolerated over an extended period. When the S&P 500’s CAPE Ratio tops 40, history foretells nothing short of a bear market.
Image source: Getty Images.
Bear markets beget opportunity for patient investors
For short‑term traders and those trying to time the market, history probably isn’t your friend right now. But for investors who can take a step back and examine the bigger picture, history is often their greatest ally.
To be clear, stock market corrections and bear markets are an inevitable aspect of the investing cycle and should be viewed as the price of admission to one of the world’s greatest wealth creators. Yet just because the Dow, S&P 500, and Nasdaq occasionally glide lower, it doesn’t mean bull and bear markets follow a straight line.
According to Bespoke Investment Group, there’s a miles‑wide disparity between S&P 500 bull and bear markets. Whereas the average bear market over the last 97 years has found its trough in an average of 286 calendar days (≈ 9½ months), the typical S&P 500 bull market has persisted 3.6 times as long (1,023 calendar days).
But the true merit lies in patience, as highlighted by Crestmont Research’s annual data study. Their 107 rolling 20‑year total‑return series—including dividends—covers the S&P 500 as far back as 1900‑1919 through 2006‑2025. Notably, **all** 107 windows generated a positive annualized return. In plain terms, anyone buying an S&P 500‑tracking fund from any starting point in this span would have earned money every year. If an investor enters at any of those 107 intervals, the mathematics guarantee growth despite intra‑period volatility.
History and the power of perspective confirm that regardless of recessions, depressions, hyperinflation, wars, pandemic shocks, Fed tightening cycles, or bubble bursts, markets have historically driven higher over multi‑decade horizons. If the Shiller P/E signals another breach above 40, treat it as a generational investment chance.
Should you buy stock in S&P 500 Index right now?
Before you purchase equity exposure to the S&P 500, consider the expert verdict.
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Sean Williams holds no position in any listed securities; the Motley Fool similarly maintains no holdings. The outlet applies a comprehensive disclosure policy.