History Says Every S&P 500 Bear Market Has Ended the Same Way. Here's the Pattern.

A bear market has arrived -- at least for AI stocks. The Global X Artificial Intelligence & Technology ETF (NASDAQ: AIQ), for example, is down roughly 10% over the past 30 days. Nvidia (NASDAQ: NVDA), meanwhile, has lost more than 25% of its value over the same period.

The risk of contagion is widely reported. AI companies and their suppliers now constitute nearly half of the S&P 500 index's value. Jitters in the AI sector have a disproportionate ability to drag down the entire stock market.

Worried about a market crash? Here's how to make sure your portfolio profits no matter what happens.

History says to do this during a market crash

Right now, the S&P 500 index trades at roughly 26 times earnings. That's well above its long-term average of around 15 to 16 times earnings. But there's a catch: Corporate profit margins have risen significantly in recent decades, which often leads to elevated valuations.

"Profit margins for the S&P 500 are at all-time highs and considering ROEs as well it is not at all surprising that the market is trading at historically rich valuations," observes Jason Trennert, CEO of Strategas Asset Management. "The U.S. equity market is going to trade at higher multiples for a long time because margins are going to be higher in the future than in the past," adds Adam Parker of Trivariate Research.

What those comments ignore, however, is that higher profit margins largely belong to technology companies.

"As a business owner, higher profit margins, all other things being equal, are more valuable," Bill Stone explained in a 2024 article for Forbes. "The profit margins for the technology sector are close to double the market as a whole, which helps explain the premium valuation."

Image source: Getty Images.

If AI companies comprise nearly half of the S&P 500's valuation, and these companies are what's propping up marketwide profit margins, a decline in the AI sector could have devastating effects on the rest of the market.

Here's the thing: None of that might matter over the long term.

At the start of 2007, the financial sector accounted for 22% of the S&P 500's value, contributing more than one-quarter of its earnings. In the 1980s, for comparison, both figures were closer to just 6%. When the financial crisis arrived, the record weighting of financial stocks forced the S&P 500 index down sharply. But even if you bought at the peak of the 2007 bubble, you'd still be sitting on a profit of more than 400% if you had held on through today.

The dot-com bubble played out similarly. Right before the dot-com bubble burst, tech stocks accounted for approximately one-third of the S&P 500's valuation. As with the financial crisis, however, if you had purchased an S&P 500 index fund right before the crash, you'd still be sitting on a long-term profit of more than 400%.

The point here isn't necessarily to go all-in when markets are near their peaks. It's that investment timing matters far less than holding period. Long-term investors can compensate for poor investment timing simply by holding on through the drought.

Of course, today's conditions could always be different.

"Today, the S&P 500 is more concentrated than at any point since the late-1990s tech bubble," observes research from UBS. "It's only natural for investors to wonder if we're seeing the early signs of a bubble."

No one knows exactly where markets are headed next, and it's very possible that an AI bubble is currently in the process of popping. If you're retired or on a fixed income, taking gains at today's valuations may not be such a bad idea. If you expect to remain in the market for another few decades, history paints a clear picture of what you should do next: continue putting more money to work regularly while maintaining a multi-decade time horizon.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.