We're Witnessing the Stock Market Do Something for Only the 3rd Time in the Last 100 Years, and History Is Crystal Clear on What's Next for Stocks

With nearly 10 months in the books, 2026 has shaped up as another stellar year for Wall Street and investors. As of the closing bell on Oct. 19, the timeless Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and tech-inspired Nasdaq Composite (NASDAQINDEX:^IXIC) had rallied 8.1%, 12.4%, and 13.7% year to date.

The stock market has been propelled higher by a confluence of factors, including (but not limited to):

• The artificial intelligence (AI) infrastructure build-out
• Considerably better-than-expected corporate earnings
• Investor euphoria regarding record-breaking initial public offerings
• Record S&P 500 share buyback activity

But with the S&P 500 and Nasdaq Composite more than doubling from their October 2022 bear market lows, the age-old question has to be asked: Are things too good to be true on Wall Street?

Image source: Getty Images.

While long-term data show that Wall Street's major stock indexes rise over multiple decades, the performance of equities over shorter timelines isn't always as rosy. Currently, we're witnessing the stock market do something for only the third time over the last century -- and the previous two occurrences proved disastrous for stocks.

Stock valuations are knocking on the door of uncharted territory

Just as the stock market has a laundry list of upside catalysts, there are always headwinds waiting in the wings to knock equities off their pedestal. Examples include rapidly rising outstanding margin debt, soaring long-duration Treasury bond yields, and persistently elevated inflation.

But there's perhaps no greater threat to the continuity of the AI-driven bull market than premium stock valuations.

Value is one of the trickiest subjects to discuss, given that there's no one-size-fits-all blueprint to evaluate businesses or the broader market. It's not uncommon for emotions or subjectivity to come into play. These variables are a big reason why it's so difficult to accurately forecast short-term directional moves in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.

But there's one valuation tool that's demonstrated a true knack for cutting through subjectivity and emotion to provide investors with invaluable valuation insights: the S&P 500's Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).

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

Despite being introduced by economists less than four decades ago, the Shiller P/E Ratio has been backtested over 150 years. Since January 1871, it's averaged a multiple of 17.44. As of the closing bell on Oct. 19, the S&P 500 Shiller P/E Ratio was nearing 41.

Over the last 100 years, the S&P 500's CAPE Ratio has exceeded 40 just three times, including the present -- and the prior two instances foreshadowed significant stock market declines:

• January 1999 to September 2000: The advent and proliferation of the internet led to some eye-popping valuations, the likes of which investors had never before witnessed. In December 1999, the CAPE Ratio peaked at an all-time high of 44.19. In March 2000, the dot-com bubble burst, eventually stripping the S&P 500 and Nasdaq Composite of 49% and 78% of their respective values by October 2002.
• January 2022: During the first week of January 2022, with fiscal stimulus checks from the COVID-19 pandemic fueling risk-taking on Wall Street, the Shiller P/E Ratio topped 40 during a continuous bull market for only the second time in a century. Over the next nine months, the 2022 bear market wiped out a fifth, a quarter, and a third of the Dow's, S&P 500's, and Nasdaq's respective values.
• May 2026 to present: Though the CAPE Ratio has reached 40 several times over the last year, it's been consistently above 40 for five months (and counting). Thus far, it's peaked at 42.84 on June 1.

The last 100 years of Shiller P/E Ratio data show that premium valuations aren't tolerated over an extended period. Although this time-tested valuation tool can't identify when the music will stop or pinpoint the catalyst that causes stocks to fall, it has a perfect track record of portending sizable stock market declines.

Image source: Getty Images.

Short-term pain can be a blessing in disguise for patient investors

Based solely on historical precedent, the short-term outlook for equities is somewhat dire. Though demand for AI infrastructure is off the charts, it wouldn't take much of a disappointment to knock a stock market that's priced for perfection off its pedestal.

At the same time, short-term pain can often be a blessing in disguise for patient investors.

To state an unpleasant but necessary point, stock market corrections and bear markets are inevitable when putting your money to work on Wall Street. They're a normal part of the investing cycle and akin to the price of admission for access to one of the greatest wealth creators on the planet.

But stock market corrections and bear markets share another link: they're short-lived.

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

In late May, analysts at Bespoke Investment Group published a data set on X (formerly Twitter) that examined the correlation between S&P 500 bull and bear markets since the start of the Great Depression in September 1929. What researchers uncovered was a stark difference between optimism and pessimism among investors.

On the one hand, the typical S&P 500 bear market over the last 97 years has reached its trough after 286 calendar days, or approximately 9.5 months. Furthermore, no bear market has lasted longer than 630 calendar days.

Meanwhile, Bespoke found that the average S&P 500 bull market endured for 1,023 calendar days, or 3.6 times longer than the typical bear market. Out of 27 bull markets since September 1929, just over half (14) have lasted longer than the aforementioned lengthiest bear market.

No matter how dire things may appear, maintaining perspective and optimism are the keys to success for long-term-minded investors.

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.