The Stock Market Is on the Brink of Doing Something That Hasn't Been Observed Since 1871 -- and Even Wall Street Analysts Are Worried

Despite a volatile March that saw the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) dip into correction territory, and the Dow Jones Industrial Average (DJINDICES: ^DJI) endure a steep pullback, it's shaping up to be another phenomenal year for Wall Street and investors. Through the closing bell on June 8, the Dow, S&P 500, and Nasdaq had rallied by approximately 6%, 8%, and 12%, respectively, since the year began.

Catalysts have been bountiful, led by the evolution of artificial intelligence, the advent of quantum computing, and record S&P 500 share buybacks in 2025.

Nevertheless, headwinds loom large for Wall Street's historic rally. While inflation and the Iran war are dominating headlines, perhaps the greatest risk to the stock market has to do with its otherworldly valuation.

Image source: Getty Images.

The stock market is close to eclipsing its priciest valuation over 155 years

To state the obvious, there isn't a one-size-fits-all guide to evaluating and valuing public companies or the broader market. The subjectivity that comes with valuing stocks and the broader market is one of the primary reasons short-term moves are so challenging to predict accurately.

Most investors tend to rely on the time-tested price-to-earnings (P/E) ratio as their preferred valuation tool. The P/E ratio is calculated by dividing a company's share price by its trailing 12-month earnings per share (EPS). While it's a great tool for quickly evaluating mature businesses, it has its shortcomings with growth stocks and during recessions, when EPS can turn negative.

This is where the S&P 500's Shiller P/E Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), can be incredibly useful. The Shiller P/E is based on average inflation-adjusted EPS from the previous 10 years, meaning recessions won't render it useless. It's the perfect valuation tool to cut through the emotions and subjectivity that can skew valuation analyses.

Though the CAPE Ratio was introduced in the late 1980s, it's been back-tested to January 1871. Over the last 155 years, it's averaged a relatively modest multiple of 17.38.

Shiller PE Ratio is now just 3.5% away from passing the Dot Com Bubble as the most expensive stock market valuation in history 🚨🚨🚨 pic.twitter.com/1ceOa3yhfs

-- Barchart (@Barchart) June 1, 2026

Recently, the S&P 500's Shiller P/E Ratio peaked at 42.84. That's the second-highest multiple since 1871, surpassed only by the all-time high of 44.19 in December 1999, just a few months before the dot-com bubble burst.

Historically, CAPE Ratios above 30 have foreshadowed significant downturns on Wall Street. Although this valuation tool can't pinpoint when the proverbial music will stop, readings above 30 have all eventually (keyword!) been followed by declines of at least 20% in the Dow Jones Industrial Average, S&P 500, and/or Nasdaq Composite. In other words, premium stock valuations aren't well-tolerated on Wall Street.

Even Wall Street professionals can't ignore how far above historic norms stock valuations currently are. On June 5, Bank of America Securities' Savita Subramanian noted that the S&P 500 was "statistically expensive on 17 of 20 metrics," and pointed out that approximately 70% of the bear market signals Bank of America Securities follows have been triggered. Subramanian and her team of strategists cautioned that the time to take profits has arrived.

Historical precedent is undefeated on Wall Street since 1871. It's simply a matter of time before a majority of investors come to this realization.

Image source: Getty Images.

Terrifying valuation news comes with a silver lining for patient investors

The prospect of a 20% (or considerably larger) decline in one or more of Wall Street's major indexes is probably unnerving to most investors. Most of us aren't fans of steep red arrows in our portfolios. However, some of Wall Street's greatest investment opportunities occur during periods of panic and disappointment.

Stock market corrections, bear markets, and crashes are normal and often emotion-driven events. This means fiscal and monetary policy shifts can't stop the occasional downturn on Wall Street. But investors' perspectives can change everything.

Every year, analysts at Crestmont Research refresh a data set that calculates the rolling 20-year total return (including dividends) of the S&P 500, dating back to 1900. Even though the S&P 500 wasn't incepted until 1923, researchers were able to piece together its total returns by tracking the performance of its components in other major indexes since 1900. This yielded 107 rolling 20-year periods of total return data.

Crestmont Research found that all 107 timelines generated a positive annualized total return. If you, hypothetically, purchased an S&P 500-tracking index at any point between 1900 and 2006 and held it for 20 years, you would have made money every time. Regardless of whether the stock market navigated recessions, depressions, wars, pandemics, and so on, it always moved higher over rolling 20-year periods, including dividends.

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

Additionally, a recent analysis from Bespoke Investment Group uncovered just how wide the disparity is between bull and bear markets on Wall Street.

Bespoke's researchers examined every S&P 500 bull and bear market since the start of the Great Depression in September 1929. Of the 27 bear markets analyzed, the average duration was just 286 calendar days (about 9.5 months), with none exceeding 630 calendar days.

On the other hand, the typical S&P 500 bull market has lasted 1,023 calendar days (nearly 3.6 times as long as the average bear market). Further, 10 of 27 bull markets have endured at least 1,324 calendar days.

Although history doesn't always offer the rosiest short-term forecast, it's unequivocally the biggest ally of long-term investors.

Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.