We're Witnessing the Stock Market Do Something for Only the 6th Time in 98 Years, and History Couldn't Be Clearer What's Next for Stocks

With roughly three months left in 2026, it's shaping up as another big win for investors. As of midday trading on Sept. 29, the ageless Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and tech-focused Nasdaq Composite (NASDAQINDEX:^IXIC) were higher by 6.6%, 11.9%, and 15.1% for the year.

Wall Street's bull market is on the doorstep of celebrating its fourth anniversary, with the artificial intelligence infrastructure build-out leading the way. Empowering software and systems with the tools to make split-second, autonomous decisions is a multitrillion-dollar opportunity that investors simply don't want to miss.

While more than a century of data shows that Wall Street's major stock indexes rise over long periods, historical precedent also notes that bull markets aren't indefinite.

Image source: Getty Images.

We're currently witnessing the stock market do something for only the sixth time over the last 98 years. The previous five occurrences all portended significant stock market declines.

Dubious stock valuation history is being made

Though there is a laundry list of headwinds waiting in the wings, including a historic bond market sell-off, persistently elevated inflation, and a parabolic increase in outstanding margin debt, there's perhaps no bigger risk to the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite than premium stock valuations.

The tricky thing about analyzing stock valuations is that there's no one-size-fits-all approach. The subjectivity and emotion that individual investors bring to their analysis are the primary reasons why it's nearly impossible to accurately forecast short-term directional moves for Wall Street's major stock indexes.

Thankfully, one time-tested valuation tool, introduced by economists in the late 1980s, can successfully cut through subjectivity and emotion to offer investors the closest thing they'll get to an apples-to-apples valuation comparison on Wall Street: the S&P 500's Shiller Price-to-Earnings (P/E) Ratio.

The Shiller P/E Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), is based on average inflation-adjusted earnings over the prior 10 years. Whereas the traditional P/E ratio, which only accounts for trailing 12-month earnings, is easily tripped up by recessions, the Shiller P/E Ratio remains useful in all situations.

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

Since January 1871, the CAPE Ratio has averaged 17.42. As of the closing bell on Sept. 28, it clocked in at a multiple of 41.16 -- quite the premium to its 156-year average.

But what's most telling is how the stock market performs after the S&P 500's Shiller P/E crosses above 30 for a period of at least two months. Including the present, the Shiller P/E Ratio has exceeded 30 on six occasions over the last 98 years, and the previous five instances all foreshadowed significant declines for the stock market:

• August to September 1929: The lead-up to the start of the Great Depression was the first time the CAPE Ratio surpassed 30. This was followed by the most painful downturn in Wall Street's storied history, with the Dow Jones Industrial Average losing 89% of its value.
• June 1997 to August 2001: The dawn of the internet was a time for big expectations and premium valuations. In December 1999, the CAPE Ratio hit an all-time high of 44.19. Eventually, the dot-com bubble burst, wiping away 49% and 78% of the S&P 500's and Nasdaq Composite's respective values.
• September 2017 to November 2018: The third occurrence of the Shiller P/E Ratio above 30 ended with a fourth-quarter swoon in 2018 that saw the benchmark S&P 500 lose about 20% of its value.
• December 2019 to February 2020: In the months leading up to the COVID-19 crash, the CAPE Ratio ascended above 30 yet again. The five-week COVID crash wiped away 34% of the S&P 500's value in just 33 calendar days.
• August 2020 to May 2022: The fiscal stimulus-fueled rally after the COVID-19 crash briefly lifted the CAPE Ratio above 40 during the first week of January 2022. However, the nine-month-long 2022 bear market eventually slashed the Dow, S&P 500, and Nasdaq by approximately 20%, 25%, and 33%, respectively.
• November 2023 to present: We're currently witnessing the second-priciest stock market in history, with the Shiller P/E Ratio peaking at 42.84 on June 1.

History couldn't be any clearer about what comes next for stocks. Historical precedent shows that premium valuations aren't tolerated over extended periods. Although this time-tested valuation tool can't tell us precisely when the stock market will top or what catalysts will send stocks tumbling, it foreshadows, at minimum, an eventual 20% decline in the Dow, S&P 500, and Nasdaq Composite.

Image source: Getty Images.

Short-term pain can lead to long-term promise for investors

Based on what history shows, the relatively short-term outlook for equities isn't rosy. Thankfully, history is a two-sided coin and, arguably, the greatest ally of long-term-minded investors.

On the one hand, historical precedent offers a sobering message that stock market corrections and bear markets are inevitable. Given that sharp downturns are often driven, in part, by investors' emotions, no amount of fiscal or monetary policy maneuvering can prevent the Dow, S&P 500, and Nasdaq Composite from declining by 10% or more from time to time.

But history also shows that bull and bear markets on Wall Street aren't linear.

In late May, researchers at wealth management firm Bespoke Investment Group published a data set on X (formerly Twitter) comparing the length of every S&P 500 bull and bear market since the start of the Great Depression in September 1929. Bespoke's analysis highlighted the disparity between optimism and pessimism on Wall Street.

In one corner, the average S&P 500 bear market has lasted just 286 calendar days, or roughly 9.5 months. By comparison, the typical bull market has persisted 1,023 calendar days, or about 3.6 times as long.

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

A separate analysis from Crestmont Research took things a step further by examining the rolling 20-year total returns, including dividends, of the broad-based S&P 500 since 1900. This required researchers to track the performance of its components in other major indexes back to 1900, since the S&P wasn't incepted until 1923.

Crestmont's analysis spanned 107 rolling 20-year periods (1900-1919, 1901-1920, and so on, through 2006-2025), and showed that all 107 periods generated a positive average annual return, including dividends.

In other words, when investors buy an S&P 500-tracking fund isn't nearly as important as how long investors are willing to hold it. Based on Crestmont's analysis, an investor could, hypothetically, have purchased at the peak of the dot-com bubble, ahead of the mid-1970s oil embargo, or ahead of Black Monday in 1987, and still come out a winner as long as they held for 20 years.

If the Shiller P/E Ratio accurately portends trouble once again, consider the subsequent short-term pain an opportunity to pounce.

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.