This Rare Market Warning Signal Has Flashed Only 2 Times Before. History Says This Comes Next.

The market just seems to keep going up, up, up. The S&P 500 (SNPINDEX: ^GSPC) has risen by 11.5% so far this year. That's on top of a 16.4% gain last year, the 23.3% gain in 2024, and the 24.2% gain in 2023. But investors are getting nervous that it may not last.

According to the American Institute of Individual Investors' weekly sentiment survey, 44.4% of individual investors expect the market to fall over the next six months. That's much higher than the historical average of 31.5%.

There's another major warning signal for investors that has only occurred twice before. Both times, it preceded a huge market crash. Here's what to know.

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A perfect track record so far

The sign is the Shiller CAPE ratio, which was developed in 1988 by economist Robert Shiller to calculate a price-to-earnings ratio for the entire S&P 500. CAPE stands for "cyclically adjusted price-to-earnings." Shiller went on to retroactively compute the ratio back to 1871.

During that time, the CAPE ratio has only gone above 30 twice. The first time was the late 1920s, when it peaked at 32.56, just before the Great Depression. The second time was in the late 1990s, when it peaked at 44.2 just before the dot-com bust of 2000.

Currently, the CAPE ratio is at 41.2. It climbed above 30 in 2017, and has been moving higher ever since, punctuated only by small dips in 2020, 2022, and 2025.

Here's what investors should -- and shouldn't -- do, given this news.

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Don't panic

Of course, when you read that a rare warning sign with a perfect track record of preceding a major stock market crash has been triggered, it's hard not to panic. But history shows that's the wrong move.

First of all, nobody knows exactly when a market crash will occur, even when conditions seem ripe for one. In 1929, the CAPE ratio surpassed 30, less than three months before the stock market crash. In the lead-up to the dot-com bust, it surpassed 30 in mid-1997, and continued to rise for more than two years until the crash began in early 2000.

The CAPE ratio stayed below 30 between 2002 and late 2017, nearly nine years ago. If you'd pulled your money out of the market when it first happened, you would have missed out on returns of about 190%.

In fact, research by The Motley Fool has shown that even after a crash has begun, it's almost always better to keep your money invested than to pull it out. That's because if you pull your money out after a crash has begun, you're selling your stocks at a discount, and if you wait to buy back in, you're likely missing out on some gains. Stock prices are considered "leading economic indicators," meaning they often recover before a recession or other crisis has fully abated.

The best thing for investors to do right now is to recognize that a crash may be coming, so they don't get surprised and act rashly if one occurs.

John Bromels 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.