The Stock Market Is Doing Something for Only the 6th Time in 156 Years, and History Says It's Clear What Comes Next for Stocks

Despite a few periods of short-lived volatility, 2026 has shaped up as another banner year for the stock market. The ageless Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and innovation-powered Nasdaq Composite (NASDAQINDEX:^IXIC) have reached several record highs, courtesy of the artificial intelligence (AI) infrastructure build-out.

While history decisively shows that Wall Street's major stock indexes rise over long periods, it also tells us that bull markets aren't indefinite and that when things look too good to be true, they typically are.

Currently, we're witnessing the stock market do something for just the sixth time since January 1871 -- and if history has its say, it's pretty clear what comes next for stocks.

Image source: Getty Images.

The stock market is in nearly uncharted territory

At any given time, several headwinds are waiting in the wings to knock the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite off their respective pedestals. Current examples include the parabolic increase in outstanding margin debt, persistently elevated inflation, and the potential for an AI bubble-bursting event.

But among this laundry list of headwinds, none stands out more than premium stock valuations.

Given that there's no one-size-fits-all blueprint to evaluate and value individual companies or the broader market, discussing value can be incredibly tricky. The subjectivity and emotion that come into play when valuing stocks or the broader market are what make accurately predicting short-term movements so challenging.

Most investors rely on the price-to-earnings (P/E) ratio to quickly evaluate the relative cheapness or priciness of a public company or the broader market. Unfortunately, the traditional P/E ratio isn't perfect. For instance, it loses its utility if corporate earnings turn negative during a recession.

This is where the stock market's most time-tested valuation tool comes in handy: the S&P 500's Shiller P/E Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio). Since the Shiller P/E Ratio is based on average inflation-adjusted earnings over the trailing 10 years, a recession won't make this valuation tool useless.

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

When backtested to January 1871, the S&P 500's Shiller P/E Ratio has averaged 17.45. As of the closing bell on Nov. 10, it clocked in at 39.70, or 128% above the long-term average.

While value is a tricky subject to tackle, history has consistently shown that bad things happen when the CAPE Ratio surpasses 30. The stock market has exceeded this arbitrary line in the sand six times over the last 156 years, including the present, and the previous five all ended poorly for equities:

• August to September 1929: A parabolic increase in valuations occurred immediately before the Great Depression took shape and eventually wiped out 89% of the Dow Jones Industrial Average's value.
• June 1997 to August 2001: The CAPE Ratio registered its all-time high of 44.19 in December 1999, mere months before the dot-com bubble burst. The S&P 500 and Nasdaq Composite lost 49% and 78% of their respective values after the internet bubble burst.
• September 2017 to November 2018: The third time the CAPE Ratio exceeded 30 ended with the S&P 500 sinking by roughly 20% during the fourth quarter of 2018.
• December 2019 to February 2020: The Shiller P/E Ratio topped 30 just before the COVID-19 pandemic struck, wiping away 34% of the broad-based S&P 500's value in only 33 calendar days.
• August 2020 to May 2022: Fiscal stimulus checks fueled risk-taking during the pandemic, pushing the CAPE Ratio briefly above 40 during the first week of January 2022. The ensuing 2022 bear market lopped approximately one-fifth, one-quarter, and one-third off the Dow, S&P 500, and Nasdaq Composite, respectively.
• November 2023 to present: The AI revolution pushed the CAPE Ratio as high as 42.84 in early June 2026.

History makes it abundantly clear that premium valuations lack staying power. Although the Shiller P/E Ratio offers no help in determining when the stock market will top or which catalysts will send stocks over the edge, it has a flawless, 156-year backtested track record of foreshadowing significant downside in the Dow, S&P 500, and Nasdaq Composite.

Image source: Getty Images.

Historical precedent is entirely based on investors' perspectives

Though history offers a relatively dire outlook for investors, the silver lining is that the outcome can change based on investors' perspectives. While the coming quarters may prove bleak, the long-term outlook for equities has arguably never been brighter.

For example, history shows that stock market corrections and bear markets are inevitable aspects of the investing cycle. No amount of well-wishing can prevent these often emotion-driven double-digit downturns.

But history also shows that stock market corrections and bear markets tend to be short-lived.

In late May, the analysts at independent research firm Bespoke Investment Group published a data set on X (formerly Twitter) that calculated and compared the length of 27 separate S&P 500 bull and bear markets since the start of the Great Depression in September 1929. This data set offered tangible evidence of the milewide gap between optimism and pessimism on Wall Street.

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

According to Bespoke Investment Group, the average S&P 500 bear market has lasted 286 calendar days (about 9.5 months) over the previous 97 years. Furthermore, none of the 27 bear markets surpassed 630 calendar days.

By comparison, the typical S&P 500 bull market has persisted for 1,023 calendar days -- roughly 3.6 times as long as the average S&P 500 bear market -- with 14 of 27 bull markets lasting longer than 630 calendar days.

Although there's no magic predictive tool that can consistently tell us when stock market downturns will begin, history has repeatedly shown that staying the course and buying into substantive dips is a winning strategy for long-term-minded, optimistic investors. Even if history repeats and the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite plunge by at least 20% in the not-too-distant future, patient investors will be well positioned for success.

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.