The S&P 500 Is Doing Something Unseen in More Than 100 Years -- Here's What History Says Happens Next

The S&P 500 (SNPINDEX: ^GSPC) has experienced one of the strongest bull markets in history during the past few years. The index produced total returns of 26%, 25%, and 18% in 2023, 2024, and 2025, respectively, and it's posted another 7.8% gain year to date (as of June 12). And that rally follows a strong performance ever since the market bottomed in March 2009.

But as the benchmark index sits near its recent all-time high, investors may be growing increasingly concerned about valuation. For example, the S&P 500's Shiller price-to-earnings (P/E) ratio currently sits at more than 41, a level it hasn't seen outside of the dot-com bubble. Meanwhile, the price-to-book and price-to-sales ratios of the index are sitting at all-time highs.

Warren Buffett's favorite valuation measure is comparing the market capitalization of the stock market to gross domestic product (GDP). The S&P 500's market cap currently is double the trailing-12-month GDP, the highest level since 1929. And if you adjust that ratio for prevailing Treasury bond yields, the S&P 500 is trading at its highest premium in more than 100 years, dating back to 1920, according to CME Group data.

Although that might concern some investors, a couple of key factors in today's market should provide some comfort.

Image source: Getty Images.

The biggest indication that stocks can keep climbing

Despite high stock valuations, there are some encouraging market trends that could suggest the bull market can continue for several more years, according to CME analysts led by Erik Norland.

First and foremost is corporate earnings. Although the Shiller P/E ratio has climbed to a very high level, it's important to understand how to calculate that ratio. It takes the earnings of each S&P 500 component during the past 10 years and adjusts each for inflation. It then averages the inflation-adjusted results and divides the current market price by that average.

That makes the Shiller P/E a backward-looking metric. And although it typically does a good job of estimating forward returns, a company's value is more closely tied to its future earnings power.

To that end, corporate earnings are soaring, with the S&P 500 reporting aggregate earnings growth of 28.6% in the first quarter. Analysts are projecting full-year earnings growth of 22.8%, well above the historic single-digit percentage average.

As a percent of GDP, corporate earnings recently hit a new high. Analysts at CME Group found corporate earnings as a percentage of GDP peaked 15 to 36 months before stock prices peaked in 2000 and 2007, and it doesn't look like earnings have peaked yet or will anytime in 2026.

Bond investors are signaling high degrees of confidence

Bond investors can provide key insights into the market's risk appetite and the overall outlook for businesses and the broader economy. Buyers will flock to high-yield corporate bonds when they're confident a business will continue to prosper and be able to pay on its debt. As a result, the yield on those investments drops.

Although it's unlikely they will reach yields as low as those of Treasury bonds backed by the U.S. government, the difference in yields (i.e., the spread) between corporate bonds and government bonds narrows as investors become more confident in the economy. Conversely, the spread will widen as investors become more wary of a business's future prospects, often signaling a stock crash on the horizon, the CME analysts point out.

That pattern played out precisely in 2000 and 2007. However, credit spreads remain near their historic lows as of the end of May. That's another signal that a market plunge could still be years away.

Don't get complacent

Despite the positive signals from the market, investors should remain focused on buying stocks at a good value. Markets can shift at any moment, regardless of historical patterns.

Remember Buffett's adage to be fearful when others are greedy. With the S&P 500 market cap reaching extremely elevated levels relative to GDP, it warrants remaining fearful. But fear shouldn't paralyze you.

Buying shares of companies with strong competitive advantages operating in stable, growing markets will often overcome any market downturns in the long run. At the same time, continuing to buy ensures you can participate in any remaining upside in the current market, and there are plenty of indications it can keep climbing.

Although you should pay attention to valuations, be sure to consider them in the context of your expectations for each stock you're planning to buy and the overall economy. Sometimes it's worth paying a higher multiple for a fantastic business with excellent growth prospects. Even Warren Buffett has been known to do just that.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.