Jamie Dimon's Latest Warning Sends Shockwaves Through Wall Street. History Is Very Clear About What Happens Next.

Stocks have soared over the past few years amid enthusiasm about artificial intelligence (AI) and its ability to transform the way many things are done. As investors rushed to get in on AI stocks, major benchmarks have climbed. The S&P 500 has advanced 78% over the past three calendar years, and the Dow Jones Industrial Average recently surpassed the level of 53,000 for the first time ever.

Of course, there has been some hesitation in the market as investors considered the ongoing turmoil in Iran and rising inflation in the U.S. and questioned whether the high levels of spending on the AI build-out would yield rewards. But, in general, stocks have continued to march higher.

Against this backdrop, Jamie Dimon, chief executive officer at JPMorgan Chase, this week sent shockwaves through Wall Street with a warning. And history is very clear about what happens next.

Image source: JPMorgan Chase & Co.

Investors focus on AI stocks

So, first, a bit more detail regarding today's market environment. As mentioned, AI stocks continue to be a focus, with investors rotating in particular into companies offering the memory and storage needed to accomplish key AI tasks. For example, for an AI agent to do its job of taking action on problems on behalf of humans, it needs logic chips for compute power, but it also requires memory, and for this, companies have turned to names like Micron Technology and Sandisk. Revenue has soared at these players and so has stock performance, with the shares advancing more than 200% and 400%, respectively, this year.

And other key AI players such as Nvidia, leader in the logic chip space, and Alphabet, a cloud computing giant, have seen their stocks rise in recent years -- they've climbed in the triple-digits over the past three.

To keep this market advancing, tech giants are spending billions of dollars on the infrastructure build-out. Alphabet, Microsoft, Meta Platforms, and Amazon aim to invest nearly $700 billion this year alone.

Though certain AI and tech stocks have seen a pullback in recent times, the general direction continues to be upward.

Jamie Dimon's words about the market today

Now, let's consider Jamie Dimon's warning to Wall Street, delivered in an interview this week with CNBC.

Dimon, who has in the past highlighted economic risks, says that investors are underestimating headwinds such as the turmoil in Iran and Ukraine and increased military spending amid government deficits.

In the CNBC interview, Dimon said he wouldn't be a general buyer of stocks at today's valuation levels. As for AI spending, though he says it may pay off, he added: "Will it pay off the way you expect and the timetable you expect? Definitely not."

The S&P 500 Shiller CAPE ratio illustrates Dimon's comment on valuation. This inflation-adjusted measure of stock prices in relation to earnings per share has reached a level it's only hit once before -- during the dot-com boom.

S&P 500 Shiller CAPE Ratio data by YCharts

This shows that stocks, overall, are historically expensive right now. Now, let's consider what history says about what happens next. Every time the Shiller CAPE ratio has reached a peak, the S&P 500 has followed up with a decline. In some cases, the drop was deep and long-lasting, such as after the dot-com bubble burst; in other cases, it was more measured.

S&P 500 Shiller CAPE Ratio data by YCharts

In any case, history is clear about what happens when valuations reach extremely high levels: The S&P 500 goes on to decline.

What should investors do now?

Now, let's consider what this means for you as an investor. It's impossible to predict exactly when such a pullback will come or how long it will last, but history also shows us that such downturns are never permanent. The S&P 500 and quality stocks across industries always have recovered and delivered gains over the long term.

So, the best thing you can do right now to protect your portfolio and set yourself up for a long-term win is to consider Jamie Dimon's words -- and pay close attention to valuation. You still may pick up bargains -- they exist in any market environment, and you might even find them in the AI space -- and aim to hold onto stocks for a number of years to truly benefit from their growth.

Dimon's words could send shockwaves through the market, and history might be right about possible declines ahead. But that doesn't necessarily spell disaster for investors. If you favor strong companies and long-term investing, you may set yourself up to score a significant investing win over time.

JPMorgan Chase is an advertising partner of Motley Fool Money. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, JPMorgan Chase, Meta Platforms, Micron Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.