We're Witnessing the Stock Market Do Something for Only the 3rd Time in 156 Years, and History Is Crystal Clear About What's Next for Stocks

For the better part of the last four years, Wall Street's bull market has been unstoppable. Aside from the short-lived tariff tantrum in April 2025 and a brief pullback associated with the Iran war earlier this year, the time-tested Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and tech-focused Nasdaq Composite (NASDAQINDEX:^IXIC) have all blasted to several record highs this year.

Catalysts have been abundant and include (but aren't limited to):

• The artificial intelligence infrastructure build-out
• Considerably better-than-expected corporate earnings
• Record share repurchases by S&P 500 companies
• History-making initial public offering activity

While more than a century of history has decisively shown that Wall Street's major stock indexes rise over extended periods, things may not be as ideal as the Dow, S&P 500, and Nasdaq Composite make them appear.

Image source: Getty Images.

Currently, we're witnessing the stock market do something that's only been accomplished three times over the last 156 years. When this signal appears, it has consistently foreshadowed significant declines to come for Wall Street.

Stock valuations have reached rarified territory

Make no mistake about it, there are always headwinds threatening to end Wall Street's bull market, such as rapidly rising margin debt and the potential for an extended Fed rate-hiking cycle. But if history repeats, it's premium stock valuations that offer the direst outlook for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.

To be upfront, "valuation" is a tricky subject. Without a one-size-fits-all blueprint for evaluating and valuing individual companies or the broader market, it's not uncommon for emotions or subjectivity to factor into the equation. Subjectivity and emotion are what make it virtually impossible to accurately forecast short-term directional moves in individual stocks or major stock indexes.

There is, however, one valuation tool that, when backtested, has demonstrated an uncanny ability to accurately forecast the future for Wall Street's major indexes. I'm talking about the S&P 500's Shiller Price-to-Earnings (P/E) Ratio, which is also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).

The Shiller P/E Ratio is based on average inflation-adjusted earnings over the previous 10 years. Accounting for a decade of earnings history ensures that recessions won't render this valuation tool useless, as can sometimes happen with the traditional P/E ratio when earnings (briefly) turn negative.

Stock Market Shiller PE Ratio on the verge of taking out its Dot Com Bubble all-time high 🚨 🤯 👀 pic.twitter.com/CtCmSgWnLt

— Barchart (@Barchart) July 11, 2026

Economists introduced the CAPE Ratio in the late 1980s and have backtested it as far back as January 1871. Over this roughly 156-year stretch, the average multiple is 17.42. As of the closing bell on Sept. 21, the S&P 500's CAPE Ratio clocked in at 41.60.

Including the present, there have only been three times, spanning 156 years, in which the S&P 500's Shiller P/E Ratio has topped 40 -- and the previous two occurrences were followed by notable bear markets:

• January 1999 to September 2000: The Shiller P/E Ratio reached its record high of 44.19 in December 1999, mere months before the dot-com bubble officially burst. After spending the better part of two years with a Shiller P/E above 40, the S&P 500 and Nasdaq Composite lost 49% and 78% of their values by October 2002, respectively.
• January 2022: For only a few days during the first week of 2022, the S&P 500's CAPE Ratio exceeded 40. Shortly thereafter, the 2022 bear market took shape, eventually wiping away a fifth, a quarter, and a third of the Dow's, S&P 500's, and Nasdaq's respective values over nine months.
• May 2026 to present: Although the Shiller P/E Ratio briefly poked its head above 40 several times last year and earlier this year, it's been consistently above this mark since May 2026.

History doesn't mince its words: Premium stock valuations aren't well-tolerated over an extended period. When the S&P 500's CAPE Ratio tops 40, history foreshadows nothing short of a bear market.

Image source: Getty Images.

Bear markets beget opportunity for patient investors

For short-term traders and those trying to time the market, history probably isn't your friend right now. But for investors who can take a step back and examine the bigger picture, history is often their greatest ally.

To be clear, stock market corrections and bear markets are an inevitable aspect of the investing cycle and should be viewed as the price of admission to one of the world's greatest wealth creators. But just because the Dow, S&P 500, and Nasdaq occasionally move lower, it doesn't mean bull and bear markets are linear.

According to Bespoke Investment Group, there's a mile-wide disparity between S&P 500 bull and bear markets. Whereas the average bear market over the last 97 years has found its trough in an average of 286 calendar days (about 9.5 months), the typical S&P 500 bull market has persisted 3.6 times as long (1,023 calendar days).

But the real merit of patience is seen in a data set refreshed annually by analysts at Crestmont Research. Crestmont examined the rolling 20-year total returns, including dividends, of the benchmark S&P 500 since 1900. Even though the S&P didn't officially exist until 1923, researchers were able to track its components in other major indexes as far back as the turn of the century.

^SPX data by YCharts

Crestmont's analysis yielded 107 rolling 20-year periods through 2025 (1900-1919, 1901-1920, and so on, through 2006-2025). What's noteworthy is that all 107 generated a positive annualized return. In simpler terms, if an investor had purchased an S&P 500 tracking fund (note: S&P 500 index funds weren't available on U.S. exchanges until 1993) at any point from 1900 to 2006 and held for 20 years, they would have made money every time.

History and the power of perspective show that no matter what's thrown the stock market's way -- recessions, depressions, high inflation, wars, pandemics, Fed rate-hiking cycles, bubble-bursting events, and so on -- it has always motored higher over multiple decades. If the Shiller P/E accurately foreshadows a bear market once again, consider it a potential generational investment opportunity.

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.