The Stock Market Has Been Reaching Record Highs. Here's What History Says Comes Next.

You've probably heard the saying, "Records are made to be broken." Or maybe you've heard the Wall Street version, "An all-time high isn't a ceiling." Either could be applied to the stock market right now, which has been notching record highs at an astonishing pace.

There are, however, some concerning signs in the market today. What goes up must come down, and lately, one major signal that could point to a correction or crash in the near future is flashing. If, to continue the adages, all good things come to an end, what does that mean for investors today?

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The stock market is nearing its highest valuation in history

Since late 2022, the stock market has been on a historic run.

Indeed, the three major indexes -- the S&P 500 (SNPINDEX: ^GSPC), the Dow Jones Industrial Average (DJINDICES: ^DJI), and the Nasdaq Composite (NASDAQINDEX: ^IXIC) -- have each posted double-digit gains for three consecutive years. All three are up double digits again in 2026; if those gains hold, it would mark the first four-year streak of its kind since the dot-com era.

This remarkable bull run has pushed each index to all-time highs. The catch, however, is that it has also pushed stock market valuations toward a dangerous high.

Data by YCharts

The CAPE ratio can help us gauge the market's current valuation. It compares the S&P 500's price with its average inflation-adjusted earnings over the last 10 years. Higher CAPE ratios mean the market is more expensive, while anything below the average (18) would mean investors are paying less than usual for the market's earnings.

Historically, high CAPE ratios have typically preceded market corrections or crashes. For example, during the 1920s, the CAPE hit a historic high of about 32.6 before the notorious market crash that ended the Roaring Twenties. Likewise, in 2000, the CAPE hit an all-time high of 44.2 just before the dot-com bubble burst.

Today, for the first time since the 2000s, the CAPE is back in the 40-plus territory. That makes today's market the second-most-expensive period in roughly 155 years of market history, at least by its own measure.

How to invest when market valuations are historically high

It would be a mistake to read a high CAPE as a sign to avoid the stock market. No one can predict a stock market crash, and you could miss out on some of the market's best days if you pull out your money.

Instead, I would read a high CAPE as a strong reminder to be deliberate and careful with your investments. Today's market is richly valued, and if a correction brings valuations back down to earth, some companies will weather the storm better than others. Look for blue chip companies with strong earnings, wide margins, and deep competitive moats. Conversely, be cautious with companies whose valuations depend on growth that hasn't materialized.

Ultimately, no one can time the market. Rather than predicting a market crash, it's best to stay invested and continue contributing to your investment accounts regularly. Historically, investors who stay invested over the long run have fared better than those who repeatedly jump in and out.

Steven Porrello 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.