Key Points
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Several catalysts, such as the artificial intelligence (AI) revolution, have lifted the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to record highs.
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The stock market is on the cusp of its priciest valuation since January 1871 — and that bodes poorly for investors, based on what history tells us.
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However, historical precedent can also be an investor’s greatest ally if they’re optimistic and think long-term.
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For the better part of the last 3.5 years, the stock market has been unstoppable. The timeless Dow Jones Industrial Average (DJINDICES: ^DJI) just blasted to a fresh all-time high, while the benchmark S&P 500 (SNPINDEX: ^GSPC) and technology-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC) vaulted to record highs in early June.
The catalysts behind this historic rally include (but aren’t limited to):
- The evolution of artificial intelligence (AI)
- Better-than-expected corporate earnings
- Investor euphoria for high-profile stock splits
- Excitement over mega-initial public offerings
- Record S&P 500 share buybacks in 2025
Though history has conclusively shown that Wall Street’s major stock indexes rise over long periods, it also tells us that bull markets aren’t indefinite. While no correlated event or data point can ever guarantee what’s to come on Wall Street, some aspects of history are better predictors of the future than others.
Currently, the stock market is doing something that professional and everyday investors have observed just one other time since January 1871 — and it has worrisome implications for Wall Street.
Investors won’t see this every day…
At any given time, there are always headwinds threatening to upend the stock market. For example, the threat of interest rate hikes can stymie the AI data center build-out. Likewise, outstanding margin debt is soaring, and a dramatic uptick in risk-taking has never been a good thing for the stock market.
But there’s arguably no greater red flag on Wall Street at the moment than stock valuations.
To state the obvious, there isn’t a one-size-fits-all blueprint for evaluating public companies or the broader market. What one investor considers pricey might be seen as a bargain by another. This subjectivity is one of the main reasons it’s so difficult to accurately forecast short-term directional moves for Wall Street’s major indexes.
Most investors rely on the time-tested price-to-earnings (P/E) ratio when valuing public companies. The P/E ratio is calculated by dividing a company’s share price by its trailing 12-month earnings per share (EPS). While the P/E ratio is a foundational tool for quickly evaluating mature businesses, it often struggles with growth stocks and during recessions (when EPS can turn negative).
This is where the S&P 500’s Shiller P/E Ratio (also known as the Cyclically Adjusted P/E Ratio, or CAPE Ratio) can shine. Since the Shiller P/E is based on average inflation-adjusted EPS from the previous 10 years, recessions won’t lessen its usefulness,
Shiller PE Ratio is now just 3.5% away from passing the Dot Com Bubble as the most expensive stock market valuation in history 🚨🚨🚨 pic.twitter.com/1ceOa3yhfs
— Barchart (@Barchart) June 1, 2026
Although the Shiller P/E wasn’t introduced until the late 1980s, this valuation tool has been back-tested to January 1871. Over the last 155 years and six months, the Shiller P/E Ratio has averaged approximately 17.4.
But as of the end of June, the CAPE Ratio clocked in at 41.72, or roughly 140% above its 155-year average. However, this isn’t the most surprising figure. It’s how close the CAPE Ratio is to surpassing its all-time high that’s raising eyebrows and fueling worry.
Technically, the Shiller P/E has only exceeded 40 three times over 155 years. But one of those occasions (in early January 2022) lasted just a few days and barely crept above 40. We’ve only observed a push to a Shiller P/E of 41 or above two times since January 1871.
The priciest stock market in history occurred in the lead-up to the bursting of the dot-com bubble. In December 1999, the CAPE Ratio peaked at 44.19, driven by internet hype. The current bull market, the second-priciest on record, has reached a CAPE Ratio as high as 42.84.
While the Shiller P/E Ratio can’t pinpoint when things will go south for the stock market, it does have a knack for foreshadowing significant downside in equities. For example, the S&P 500 and Nasdaq Composite lost 49% and 78% of their respective values after the dot-com bubble burst.
And it’s not just the highest reading in history that serves as a warning. There have been six occasions when the Shiller P/E has topped 30, and the previous five (excluding the present) were all followed by declines of 20% or greater in the Dow Jones Industrial Average, S&P 500, and/or Nasdaq Composite.
If history were to rhyme, yet again, a major stock market downturn is coming.
History overwhelmingly favors patient optimists
Although stock market corrections, bear markets, and crashes can be scary and tug on investors’ heartstrings, historical precedent can also be an investor’s greatest ally.
While history tells us that it’s perfectly normal for investors to overestimate game-changing technological innovations (ahem, AI), more than a century of history shows a milewide disparity between optimism and pessimism on Wall Street.
Somewhat recently, the analysts at Bespoke Investment Group published a data set on social media platform X that intricately detailed the performance of every S&P 500 bull and bear market since the start of the Great Depression in September 1929. This provided nearly 97 years of trading data comparing the calendar-day length of 27 separate bull and bear markets.
On the one hand, Bespoke found that the average bear market lasted only 286 calendar days, or the rough equivalent of 9.5 months. Furthermore, no S&P 500 bear market persisted for more than 630 calendar days.
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: pic.twitter.com/4mGsS2t2ft
— Bespoke (@bespokeinvest) May 30, 2026
In comparison, the typical bull market endured for 1,023 calendar days, or about 3.6 times longer than the average bear market. Additionally, over half of the 27 bull markets have lasted longer than the lengthiest bear market.
A separate analysis by Crestmont Research also backs up how skewed Wall Street is in favor of patient optimists.
The analysts at Crestmont examined the rolling 20-year total returns, including dividends, for the broad-based S&P 500 since the start of the 20th century. This meant tracking the performance of its components in other major indexes prior to the S&P’s inception in 1923.
Crestmont’s analysis yielded 107 rolling 20-year periods of total return data (1900-1919, 1901-1920, and so on, to 2006-2025). Researchers found that all 107 timelines produced a positive annualized return. In short, holding an S&P 500-tracking index for 20 years, through any headwinds an investor can think of, would have been profitable 100% of the time.
Regardless of what the Shiller P/E Ratio implies for the stock market over the short term, history decisively shows that patient optimists are ideally positioned for success on Wall Street.
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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.
