The Stock Market Just Flashed a Warning We Haven't Seen for More Than 20 Years. Here's What History Suggests Will Happen Next.

For the last three years, the stock market has been heavily influenced by one key theme: artificial intelligence (AI). The rise of AI has spawned an unprecedented level of demand in the technology sector in particular. However, adjacent industries including energy and infrastructure are also beginning to benefit from AI-driven tailwinds.

Against this backdrop, the S&P 500 posted a 70% gain throughout the AI revolution. As the stock market continues to soar, some investors are beginning to grow suspicious that we may be headed for a bubble-bursting event.

History suggests that a significant shift in stocks may be on the horizon. Let's dig into the market's recent fluctuations and index this data against longer-term trends. From there, investors should have a clearer idea of where to invest, given the market's current elevated state.

Image source: Getty Images.

The stock market has been a roller coaster this year

The direction of the S&P 500 has been anything but linear this year. While stocks began 2025 on a high note, things took a pronounced turn in early April following President Donald Trump's "Liberation Day" tariff announcement.

At the flip of a switch, the S&P 500 plummeted by 15% -- dragging high-flying stocks into an epic reversal.

Nevertheless, as trade negotiations took shape and corporate earnings continued to show strength, investor panic began to wane. As of this writing, the S&P 500 has soared 16% on the year. Should the index sustain these levels, it would mark the third consecutive year of double-digit gains.

Is the stock market in a bubble?

While the term "bubble" gets used a lot on financial news programs, there isn't a specific indicator or singular definition that determines whether the market is in one.

However, the S&P 500 Shiller CAPE ratio is a useful metric to consider. This tool accounts for current stock prices relative to the 10-year average of earnings (profits) in the market. In essence, the CAPE ratio attempts to smooth out market anomalies, such as periods of economic expansion or recession.

S&P 500 Shiller CAPE Ratio data by YCharts

The S&P 500 Shiller CAPE ratio is currently at 39.4. The last time it was even remotely close to this level was more than two decades ago. In case investors need a reminder, the dot-com bubble burst in early 2000.

Image source: Getty Images.

Is the stock market about to crash?

As the trends show, the stock market entered a prolonged correction following the end of dot-com euphoria. Moreover, the only other time in history that the CAPE ratio was within shouting distance of its current levels besides the dot-com era was during the late 1920s -- just prior to the Great Depression.

Given the historical data above, it appears that the S&P 500 is almost certain to head for a downward spiral. Nevertheless, there are some additional details that smart investors should be aware of.

First, the dot-com bubble was rooted in hype-driven narratives around user engagement and clicks. The reality is that many early pioneers of the internet had little business traction, limited revenue, and enormous operating losses. These companies should never have experienced skyrocketing valuations to begin with.

AI is fundamentally different. The industry's largest developers -- Nvidia, Alphabet, Amazon, Microsoft, Palantir Technologies, among others -- have already turned AI into several multi-billion dollar businesses across chips, software, and cloud infrastructure.

Additionally, sell-offs vary in terms of their duration. In other words, if stocks begin to crater, it's not necessarily an indicator that the economy is about to fall off a cliff like it did in the 1920s.

^SPX data by YCharts

Despite some road bumps along the way, the S&P 500 has proven to be an incredibly resilient investment vehicle over time.

While I can't say for certain which direction the market is headed, I can say with a high degree of confidence that it will continue to move higher over the coming decades. I bring this up to drive home one main point: Even if stocks sell off next year, history shows that it would be a winning idea to buy the dip on hold on for the long run.

Adam Spatacco has positions in Alphabet, Amazon, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.