Prediction: A Stock Market Crash Is Coming. Here's What Investors Should Do Based on Almost 7 Decades' Worth of History.

The S&P 500 (SNPINDEX: ^GSPC) index set a fresh record high last week, but it's hard to ignore the rising tide of risks. First of all, oil prices are climbing because of the ongoing conflicts across the Middle East, triggering a spike in inflation that prompted the U.S. Federal Reserve to raise interest rates at its September meeting.

Second, cracks are starting to appear in the artificial intelligence (AI) boom. The soaring cost of chips and infrastructure is forcing labs like OpenAI and Anthropic to raise prices, so according to a recent survey by UBS Group, many businesses are now prioritizing cheaper models to save money. Any subsequent drop in demand for computing power could hurt the semiconductor stocks that have led the broader market higher for the past few years.

These headwinds come as the S&P 500 trades at the second-highest valuation in its history, behind only the peak of the dot-com internet bubble in 2000, leaving it vulnerable to a potential crash. But the index has typically trended higher since it was established almost seven decades ago, so here's how investors can capitalize if there is a downturn.

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Rising interest rates are a big threat to the bull market

Technology stocks represent approximately 39.7% of the value of the entire S&P 500, so any disruption to the AI revolution could weigh heavily on the index. But interest rates might be a much bigger story for the overall market right now, particularly because so many technology companies are relying on debt to fund their data center infrastructure projects.

The Middle East is dealing with multiple conflicts right now, disrupting the flow of oil from major suppliers like Iran and Saudi Arabia. A single barrel of West Texas Intermediate oil was trading for around $91 last Friday (Oct. 9), significantly above its 2026 opening price of $57. As a result, the price of regular gasoline is soaring, but so is the price of diesel, which currently sells for above $6 per gallon across the United States.

That means consumers aren't facing higher prices just at the gas pump, but also at the grocery store and at the mall, because every product that travels by truck, boat, or plane now has higher input costs. This is stoking inflation, with the Consumer Price Index (CPI) rising at an annualized rate of 3.4% in August, well above the Federal Reserve's 2% target.

The Fed raised the federal funds rate (overnight interest rates) by 25 basis points at its September meeting to help bring down inflation, and it signaled that an additional hike could be on the horizon. The central bank's last rate-hiking cycle started in March 2022 and ended in August 2023, and it led to a decline of more than 20% in the S&P 500, constituting a technical bear market.

^SPX data by YCharts

Companies typically don't borrow as much money when interest rates rise, because the cost of credit becomes a headwind for their earnings. This means they aren't investing as aggressively to grow their businesses, so investors have to temper their future expectations, which usually translates to lower stock prices.

Moreover, rising rates force consumers to allocate more of their household budgets to debt repayments, leaving less room for discretionary spending. This feeds through to corporate profits, placing further pressure on the stock market.

Here's what investors should do if the stock market crashes

Volatility is a normal part of the investing journey. In fact, according to Capital Group, the S&P 500 experiences a bear market decline of 20% once every six years or so, and we're already four years removed from the last one in 2022. Interest rate hikes could certainly be the trigger for the next move lower, especially if they continue into 2027.

A high valuation makes the S&P 500 particularly vulnerable to a sharp sell-off. The index is currently trading at a Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio of 41.8, only slightly below its all-time high of 44.2 from the peak of the dot-com internet bubble in the year 2000.

So, what should investors do? The S&P 500 has delivered a compound annual return of 10.7% since its inception in 1957, even after accounting for every sell-off, correction, and bear market over the last 69 years. Therefore, even if an investor buys an S&P 500 index fund at the absolute top of the current bull market, history suggests they will eventually come out ahead if they just stay the course.

Volatility is the price of admission for the opportunity to earn significant long-term returns. Selling stocks during periods of market turmoil has never been the right move -- in fact, buying during the scariest moments has yielded the best results. That will almost definitely be the case again when the next crash unfolds.

Anthony Di Pizio 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.