The Stock Market Is Sounding the Alarm Right Now, and History Is Clear on What Comes Next
Key Points
The S&P 500 Shiller CAPE Ratio suggests that the market may be overvalued right now.
Historically, a higher ratio has led to a drop in stock prices.
However, history still has good news for investors.
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The stock market has had no shortage of success lately, with the S&P 500 (SNPINDEX: ^GSPC), Dow Jones Industrial Average (DJINDICES: ^DJI), and Nasdaq Composite (NASDAQINDEX: ^IXIC) soaring by 30%, 24%, and 41%, respectively, over the past 12 months.
However, all of this growth has some investors concerned that the market is overvalued and due for a correction -- or a full-blown recession. While one stock market metric is sounding the alarm right now, history still has good news for investors.
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Will the stock market crash in 2026?
The S&P 500 Shiller CAPE Ratio is a stock market metric used to compare historic market valuations. It measures the S&P 500's current price against the index's 10-year inflation-adjusted earnings, helping gauge whether the market is over- or undervalued.
A higher ratio suggests that the market may be overvalued, and historically, stock prices tend to fall in the years following peaks in the S&P 500 Shiller CAPE Ratio.
Throughout the S&P 500's history, there have only been two periods in which this ratio spiked drastically. The first was the Great Depression, when it peaked at around 35. The second was the dot-com bubble burst in the early 2000s, when it reached a record high of around 44.
As of this writing, the S&P 500 Shiller CAPE Ratio is nearing 40 -- its second highest point in history.
S&P 500 Shiller CAPE Ratio data by YCharts
To be clear, this doesn't necessarily mean that the stock market is going to crash in 2026. This metric has been steadily creeping up since the end of the Great Recession, and that's at least partly because valuations have generally increased with the rise of the tech sector.
That said, volatility or even a bear market is not off the table right now, and it's always wise to ensure your portfolio is prepared for anything.
What history says is coming next
Stock prices can't keep surging forever, so a pullback is coming sooner or later. Exactly when it might happen or how severe it could be is anyone's guess. What history is clear on, though, is that the market's long-term future is incredibly promising.
The stock market has survived countless recessions, bear markets, corrections, and crashes over the last century, and so far, it's recovered from every single one. Simply stay in the market for long enough, and you're all but guaranteed to see positive total returns over time.
^SPX data by YCharts
It's crucial, though, to invest in the right stocks. Some companies right now are being fueled primarily by hype, and if the market takes a turn, those stocks may struggle to bounce back. The healthier a company's fundamentals, the better its chances of surviving even a severe recession or bear market.
No matter when the next downturn arrives, it pays to be prepared. By loading up on quality stocks and holding them for at least a few years, your portfolio is far more likely to thrive over time.
Should you buy stock in S&P 500 Index right now?
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Katie Brockman 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.
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