For the better part of the last four years, Wall Street’s bull market has been unstoppable. Since early June, the time-tested Dow Jones Industrial Average (^DJI +0.83%), benchmark S&P 500 (^GSPC +0.59%), and technology-driven Nasdaq Composite (^IXIC +0.64%) have all blasted to fresh record highs.
Investors are finding no shortage of reasons to be excited about equities, including (but not limited to):
- The artificial intelligence (AI) infrastructure build-out
- Far better-than-expected corporate earnings
- Record S&P 500 share buyback activity
- Historic initial public offerings
But as the popular idiom goes, “when things seem too good to be true, they usually are.”
Image source: Getty Images. Image source: Getty Images.
While history can’t guarantee what’s to come, past events, more often than not, can foreshadow the future.
At the moment, the stock market is on the verge of doing something that no investor has witnessed in the last 156 years. Based on previous milestones leading to this point, trouble (and potentially a stock market crash) may be brewing.
Stock market valuations are approaching uncharted territory
Just as there’s a laundry list of things going right for the stock market, there’s also a long list of headwinds threatening to end Wall Street’s AI-driven rally, such as rapidly rising margin debt, persistently elevated inflation, and surging long-duration bond yields.
But based solely on history, there’s perhaps nothing more frightening for investors than premium stock valuations.
Defining “value” is tricky because there isn’t a blueprint for evaluating every public company or the broader market. When individual investors evaluate and value businesses, they incorporate some degree of emotion and/or subjectivity. The absence of a one-size-fits-all value approach is what makes accurately predicting short-term directional moves in the Dow, S&P 500, and Nasdaq Composite so challenging.
However, one time-tested valuation tool has done a remarkable job of providing investors with apples-to-apples comparisons of broad market valuations throughout history: the S&P 500’s Shiller P/E Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).
What gives the Shiller P/E Ratio a leg up over all other valuation tools is that it’s based on average inflation-adjusted earnings over the last 10 years. Whereas earnings turning negative during recessions can make the traditional P/E ratio useless, this isn’t the case with the Shiller P/E Ratio.
Stock Market Shiller PE Ratio on the verge of taking out its Dot Com Bubble all-time high 🚨 🤯 👀 https://t.co/CtCmSgWnLt
— Barchart (@Barchart) July 11, 2026
Though economists introduced this valuation tool in 1988, it’s been backtested to January 1871, providing roughly 156 years of monthly valuation data. Over this time, the average Shiller P/E Ratio is a relatively modest 17.42. As of the closing bell on Oct. 5, the S&P 500’s Shiller P/E clocked in at 41.67. That’s within a stone’s throw of its all-time high of 44.19, set in December 1999.
While making history is normally a good thing for the stock market, making valuation history is the exact opposite, according to historical precedent.
The first time the CAPE Ratio surpassed 30 was in August-September 1929. This two-month period of investing euphoria on Wall Street was followed by the Great Depression. The Dow Jones Industrial Average lost 89% of its value from peak to trough during the Great Depression.
Mind you, this isn’t the only time the CAPE Ratio has surpassed 30. The benchmark S&P 500 lost about 20% in the fourth quarter of 2018 after it topped 30, and the COVID-19 crash wiped away 34% of the S&P 500’s value in just 33 calendar days in February-March 2020.
The first time the CAPE Ratio exceeded 40 was during the internet-driven hype. Mere months after peaking at 44.19, the dot-com bubble burst. The S&P 500 and Nasdaq Composite had lost 49% and 78% of their respective values by October 2002.
Historical precedent isn’t subtle. When stock valuations soar to never-before-seen premiums, generational downtrends and/or stock market crashes occur. The Shiller P/E Ratio is on the verge of making dubious history and crossing above 44.19 for the first time.
Image source: Getty Images.
The good news: History works both ways and strongly favors optimists
Even though the Shiller P/E Ratio can’t tell investors when the music will stop or what catalyst will pull the rug out from beneath a historically pricey stock market, the foreshadowing is crystal clear… over the short term. But when investors take a step back and examine the bigger picture, they’ll find an entirely different story.
There’s no question that stock market corrections, bear markets, and crashes can be scary and tug on investors’ heartstrings. But these events share a common thread: they’re relatively short-lived.
In late May, the analysts at Bespoke Investment Group examined the length of 27 separate S&P 500 bull and bear market events since the start of the Great Depression in September 1929. Bespoke’s data set, published on X (formerly Twitter), highlights the night-and-day difference between optimism and pessimism on Wall Street.
In one corner, the average S&P 500 bear market reached its trough in 286 calendar days, or the equivalent of 9.5 months. Additionally, no bear market has lasted longer than 630 calendar days over the last 97 years.
The current bull market that began on 10/12/22 is now the 9th longest in S&P 500 history, surpassing the 1,324-day bull that ended on 2/9/1966: https://t.co/4mGsS2t2ft
— Bespoke (@bespokeinvest) May 30, 2026
By comparison, the typical S&P 500 bull market has persisted for an average of 1,023 calendar days, or approximately 3.6 times as long as the average bear market. What’s more, 14 of 27 bull markets lasted longer than the aforementioned lengthiest bear market.
If nearly a century of research isn’t enough, the analysts at Crestmont Research have you covered. They calculated the rolling 20-year total returns, including dividends, of the broad-based S&P 500 since 1900. Mind you, the S&P wasn’t incepted until 1923, meaning researchers had to track the performance of its components in other major indexes from 1900 to 1923.
Crestmont’s data set produced 107 rolling 20-year periods (1900-1919, 1901-1920, and so on, through 2006-2025). What’s noteworthy is that all 107 generated a positive average annual total return.
Put another way, even if investors hypothetically purchased an S&P 500-tracking fund ahead of the Great Depression, the dot-com bubble, or other major downturns or crash events, their investment would have generated a positive total return every time if it had been held for 20 years.
Even if the stock market makes dubious valuation history, well over a century of total return data suggests that long-term, optimistic investors will be just fine.