The Stock Market Is Doing Something That's Been Witnessed Just 3 Times Over Nearly 156 Years -- and This Signal Has Proven Disastrous for Wall Street

For the better part of the last 17 years, Wall Street can do no wrong. Though there have been short-lived periods of uncertainty and volatility, optimists have ruled the roost and propelled the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) to new heights.

More recently, the evolution of artificial intelligence, better-than-expected corporate earnings, record S&P 500 share buybacks, and historic initial public offering activity have been the stock market's primary catalysts.

Nevertheless, history teaches us that bull markets aren't indefinite. Although the Dow, S&P 500, and Nasdaq Composite have a knack for rising over multiple decades, stock market corrections and bear markets are par for the course when investing over the long term.

Image source: Getty Images.

While historical events can never guarantee what's to come on Wall Street, they do, more often than not, have an uncanny ability to foreshadow the future. One such ultra-rare event is occurring right now, for only the third time since the early 1870s, and it bodes poorly for Wall Street.

The stock market has reached a level observed only three times since January 1871

Make no mistake about it, there are always catalysts capable of turning the stock market on its proverbial head. For instance, historical precedent shows that parabolic moves in outstanding margin debt are a harbinger of downside for stocks.

However, no headwind is screaming louder at the moment than historically high stock valuations.

What makes valuing stocks so tricky is the lack of a blueprint. Since there isn't a one-size-fits-all way to evaluate and value all businesses or the broader market, stock valuations will always entail some degree of subjectivity and/or emotion. This subjectivity is one of the core reasons why short-term directional moves in the Dow, S&P 500, and Nasdaq Composite are virtually impossible to predict with ongoing accuracy.

But there is a valuation measure, introduced by economists in the late 1980s, that can cut through this emotion and subjectivity to provide apples-to-apples valuation comparisons across the broader market. I'm talking about the S&P 500's Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).

The beauty of the Shiller P/E Ratio is that it's based on average inflation-adjusted earnings over the previous 10 years, rather than trailing 12-month earnings, as with the traditional P/E ratio. Encompassing a decade's worth of earnings history ensures that recessions can't skew the Shiller P/E or adversely affect its usefulness.

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

The S&P 500's Shiller P/E Ratio has averaged 17.4 when backtested to January 1871. As of the closing bell on Aug. 24, the Shiller P/E clocked in at 41.84, approximately 140% above its nearly 156-year average and a stone's throw from its current bull market high of 42.84, set on June 1.

CAPE Ratios above 40 are extremely rare. Over nearly 156 years of backtesting, the S&P 500's CAPE Ratio has exceeded 40 during a continuous bull market just three times, including the present:

• January 1999 – September 2000: In the lead-up to the bursting of the dot-com bubble, the S&P 500's CAPE Ratio peaked at 44.19 (December 1999).
• January 2022: During the first week of January 2022, just before the 2022 bear market took shape, the Shiller P/E Ratio leaped just above 40.
• May 2026 – present day: The S&P 500's CAPE Ratio has prominently vacillated between the low 40s and its bull market high of 42.84.

It's what happened after each of the previous two events that should concern investors. After the Shiller P/E hit its all-time high, the dot-com bubble erased 49% and 78% of the S&P 500's and Nasdaq Composite's values, respectively. Meanwhile, the 2022 bear market saw the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite lose a fifth, quarter, and third of their respective values.

To be clear, a historically high CAPE Ratio doesn't guarantee that stocks will plunge, nor can it pinpoint when the music will stop on Wall Street. But based solely on what history has shown us, premium stock valuations aren't sustainable over long periods. Once the Shiller P/E Ratio reaches 40 (or higher), it's not a matter of if but when the stock market pays the price.

Image source: Getty Images.

History is a two-way street

The good news for Wall Street and the investing community is that historical foreshadowing isn't a one-way street. While there are several instances in which past events have forecast substantial downside in the Dow, S&P 500, and Nasdaq Composite, there's an extensive data set that shows patience and optimism pay off handsomely on Wall Street.

For example, the analysts at Crestmont Research update a data set annually that calculates the trailing 20-year total return, including dividends, of the benchmark S&P 500 since 1900. Even though the S&P 500 didn't exist at the start of the 20th century, Crestmont's analysts have tracked the performance of its components in other major indexes since 1900.

Crestmont's analysis yielded 107 separate rolling 20-year timelines (1900-1919, 1901-1920, and so on, through 2006-2025), all of which produced a positive annualized total return. In simpler terms, if an investor had, hypothetically (since index funds didn't begin trading on U.S. stock exchanges until 1993), invested in an S&P 500-tracking index fund at any point between 1900 and 2006 and held for 20 years, they would have generated a profit every single time.

Crestmont Research's data set demonstrates the value of time in the market, as opposed to trying to time market moves, as well as the power of perspective and optimism. No matter the headwinds thrown investors' way, the S&P 500 was always higher 20 years later, including dividends.

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: pic.twitter.com/4mGsS2t2ft

— Bespoke (@bespokeinvest) May 30, 2026

Bespoke Investment Group offered similar findings in a May 2026 post on X (formerly Twitter), where analysts compared the calendar-day length of every S&P 500 bull and bear market since the start of the Great Depression (September 1929).

On the one hand, the average S&P 500 bear market has lasted 286 calendar days (about 9.5 months). Perhaps even more noteworthy, no bear market has endured longer than 630 calendar days.

At the other end of the spectrum, Bespoke Investment Group calculated the average of 27 S&P 500 bull markets over the last 97 years to be 1,023 calendar days, or approximately 3.6 times longer than the typical bear market. Further, just over half (14) of these bull markets lasted longer than the aforementioned lengthiest bear market.

Statistically, long-term optimists have the upper hand on Wall Street. Although bull markets aren't indefinite, and a historically pricey stock market foreshadows potential disaster in the presumed not-too-distant future, nothing suggests the Dow, S&P 500, and Nasdaq Composite won't continue to climb over the long run.

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.