It’s been an incredible last seven years for Wall Street. Except for 2022, the benchmark S&P 500 (^GSPC +0.84%) has gained at least 16% every year for the last seven. We’ve also witnessed the ageless Dow Jones Industrial Average (^DJI +0.02%) and iconic Nasdaq Composite (^IXIC +1.71%) crest psychologically important levels of 50,000 and 25,000, respectively.
Investors have had plenty to be excited about, including the evolution of artificial intelligence, the dawn of quantum computing, record S&P 500 share buybacks, and better-than-expected corporate earnings.
But what if this wasn’t enough?
Image source: Getty Images.
While most investors enjoy watching the Dow, S&P 500, and Nasdaq Composite make history, not all historical events are necessarily good news for Wall Street. One such event, which occurred for just the second time in 155 years, offers a sobering outlook of what’s to come for stocks.
This is the second-priciest stock market since January 1871
As the stock market’s major indexes have ascended to the heavens, so have the valuations of the public companies supporting this monster rally.
Admittedly, “value” is a subjective term that varies from one investor to the next. The lack of a one-size-fits-all blueprint for evaluating stocks means that what one investor views as expensive might be seen as a bargain by another. Valuation subjectivity is a big reason short-term moves in the Dow, S&P 500, and Nasdaq Composite are so hard to predict accurately.
But there’s one time-tested valuation tool that cuts through subjectivity and emotion, providing investors with the closest thing to an apples-to-apples valuation comparison they’ll get on Wall Street: the S&P 500’s Shiller Price-to-Earnings (P/E) Ratio (also known as the Cyclically Adjusted P/E Ratio, or CAPE Ratio).
The Shiller P/E is based on average inflation-adjusted earnings over the last 10 years, meaning recessions and economic shocks won’t diminish the usefulness of this valuation tool. The same can’t be said for the traditional P/E ratio, which is based on trailing 12-month earnings.
The S&P 500’s CAPE Ratio has moved up to 40, its highest level since 2000 and now above 99% of historical valuations. $SPX pic.twitter.com/uhUt33SCp5
— Charlie Bilello (@charliebilello) April 20, 2026
Although economists introduced the CAPE Ratio in the late 1980s, it’s been back-tested to the start of 1871. Over the previous 155 years, the average multiple is approximately 17.4. As of the closing bell on May 1, the S&P 500’s Shiller P/E was tipping the scales at 41.05.
This is only the second time we’ve ever witnessed the S&P 500’s Shiller P/E Ratio reach 41. The other instance was in the months leading up to the bursting of the dot-com bubble, which saw the CAPE Ratio top out at 44.19.
History shows that every Shiller P/E above 30 has foreshadowed significant declines for the Dow, S&P 500, and/or Nasdaq Composite. The five previous instances when the Shiller P/E exceeded 30 were followed by declines of 20% to 89% in one or more of Wall Street’s major stock indexes.
If there’s a caveat to this historical data, it’s that the CAPE Ratio can’t help investors pinpoint when the music will stop for equities. But it does conclusively show that premium valuations aren’t well tolerated over extended periods.
The message couldn’t be clearer for Wall Street and investors: a significant stock market correction or bear market is expected in the not-too-distant future.
Image source: Getty Images.
The nonlinear nature of stock market cycles favors patient investors
While the prospect of a significant downturn in stocks (based on what history tells us) probably isn’t what most investors want to hear, it’s not all bad news. On Wall Street, patience and perspective tend to be an investor’s greatest allies.
Though double-digit percentage downturns are known to tug on the heartstrings of investors, they’re perfectly normal, healthy, and inevitable. There’s no amount of well-wishing or fiscal/monetary policy maneuvering that can be used to avoid stock market corrections and bear markets.
However, historical precedent also shows that corrections and bear markets turn into golden opportunities for patient/long-term investors to put their money to work on Wall Street.
If there’s a defining characteristic of bear markets, it’s that they’re short-lived. Recently, Bespoke Investment Group published a data set on social media platform X (formerly Twitter) that compared the length of every S&P 500 bull and bear market dating back to the start of the Great Depression (September 1929). The disparity between the two was night and day.
The current bull market has extended to 1,281 days.
Needs to make it to May 29th to move into 9th place all-time by surpassing the 1962-1966 bull.
It would need to make it to February 2035 without a 20% peak to trough drop to move into 1st place. 👀 pic.twitter.com/mXLqzLnDXM
— Bespoke (@bespokeinvest) April 15, 2026
On the one hand, the average of the 27 S&P 500 bear markets since September 1929 has lasted just 286 calendar days, or roughly 9.5 months. Furthermore, no bear market has endured longer than 630 calendar days.
In comparison, the typical S&P 500 bull market has persisted for 1,021 calendar days, which is over 3.5 times longer than the average bear market. The current bull market is the 10th over the last 96-plus years that’s lasted at least 1,300 calendar days.
Although a rough road may lie ahead for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, based on what the Shiller P/E has to say, the long-term outlook for stocks remains bright.
