Key Points
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The artificial intelligence (AI) infrastructure build-out has propelled the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to new heights over the last four years.
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Historical headwinds are mounting for a pricey stock market that’s seen a rapid rise in risk-taking.
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While the odds of a stock market crash appear to be rising, maintaining perspective is of paramount importance for investors.
For the better part of the last four years, it’s been all systems go for the stock market. Since the 2022 bear market bottomed, the Dow Jones Industrial Average (DJINDICES:^DJI) has rallied 84%, while the S&P 500 (SNPINDEX:^GSPC) and growth-focused Nasdaq Composite (NASDAQINDEX:^IXIC) have more than doubled.
The artificial intelligence (AI) infrastructure build-out has been the stock market’s unmistakable catalyst. The otherworldly amount of capital being spent on data center infrastructure is almost single-handedly propelling equities higher.
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While the Dow, S&P 500, and Nasdaq Composite have extensive track records of rising over multiple decades, their performance over shorter time frames can sometimes be dicey, at best. On Oct. 22, the AI-driven Nasdaq Composite plunged 694 points, or 2.6%, marking its largest daily percentage decline since June 5.
Moves of this magnitude beg the question: Is a stock market crash imminent?
History may come back to bite investors
Although past events can’t guarantee short-term directional moves for Wall Street’s major stock indexes, history has a knack for foreshadowing the future.
For example, the stock market entered 2026 at its second-priciest valuation in history. The S&P 500’s Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), nearly reached 43 in early June, compared to an average multiple of 17.44 over the last 156 years.
Since January 1871, the CAPE Ratio has exceeded 30 on six occasions, including the present. Eventually, declines ranging from 20% to 89% in the Dow, S&P 500, and/or Nasdaq followed the previous five occurrences. This is to say that premium valuations have never been well-tolerated on Wall Street.
Furthermore, history tells us that rapidly rising margin debt is a major red flag. Outstanding margin debt held by brokers, as reported monthly by FINRA, hit a record $1.502 trillion in June. Investors’ willingness to take risks is skyrocketing, as evidenced by a 77% increase in margin debt between April 2025 and June 2026.
Since 1998, short-term increases in margin debt of at least 65% have ended in disaster for the Dow, S&P 500, and Nasdaq Composite.
Image source: Getty Images.
A stock market crash is possible, but perspective is what’s important
Based on several historically accurate indicators, the odds of a stock market crash and/or significant decline do appear to be above average. But this doesn’t guarantee that equities will crash.
What’s even more important than these dire historical outlooks in the wake of a roughly 700-point single-session decline in the Nasdaq Composite is maintaining perspective.
On the one hand, stock market corrections, bear markets, and even crashes are a normal part of the investing cycle. We may not enjoy red arrows in our portfolios, but no amount of fiscal or monetary policy maneuvering can prevent downturns from happening every now and then.
However, downturns share an important trait: they resolve quickly.
Since the start of the Great Depression in September 1929, data from Bespoke Investment Group show that the average S&P 500 bear market (i.e., a 20% or greater decline) reached its trough after 286 calendar days, or roughly 9.5 months.
Conversely, the typical bull market endured for 1,023 calendar days, or approximately 3.6 times as long.
Statistically, it pays to be a long-term optimist on Wall Street. When things look their direst is typically when opportunity presents itself for investors.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.