Despite a four-week bout of heightened volatility in March tied to the Iran war, the stock market is on pace for another banner year.
As of the closing bell on Aug. 10, the timeless Dow Jones Industrial Average (^DJI -0.20%), benchmark S&P 500 (^GSPC -0.17%), and technology-driven Nasdaq Composite (^IXIC -0.28%) had gained 12.3%, 13.3%, and 14.5% year-to-date, respectively. Otherworldly spending on artificial intelligence (AI) infrastructure, coupled with corporate earnings handily outpacing Wall Street’s projections, has equity markets hitting a high note.
But there’s just one problem: eventually, the music always stops on Wall Street.
Amid this historic run-up, the stock market is on the verge of doing something that no one’s witnessed over nearly 156 years — and the consequences of reaching this mark are nothing short of dire for Wall Street and investors.
Image source: Getty Images.
Wall Street is knocking on the door of the priciest stock market in history
Headwinds are nothing new for the stock market. At any given time, one or more catalysts threaten to upend a long-lasting bull market. For example, a parabolic move higher in outstanding margin debt and persistently above-average inflation are both worrisome traits.
But there’s arguably no historical red flag that’s more glaring at the moment than stock valuations.
Valuing individual stocks or the broader market is incredibly tricky. Since there isn’t a one-size-fits-all checklist for valuing public companies or the broader market, valuations tend to be subjective. In other words, what one investor finds pricey might be considered a bargain to another. This valuation subjectivity is what makes accurately predicting short-term directional moves in the Dow, S&P 500, and Nasdaq Composite so difficult.
The time-tested method of valuing public companies has been the price-to-earnings (P/E) ratio, which is calculated by dividing a company’s share price by its trailing 12-month earnings. Unfortunately, the P/E ratio loses its usefulness during recessions, when earnings per share can turn negative.
This is where the S&P 500’s Shiller P/E Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), can shine. The Shiller P/E is based on average inflation-adjusted earnings from the previous 10 years, meaning economic shocks won’t render it useless.
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
Despite being introduced by economists less than four decades ago, the Shiller P/E Ratio has been backtested to January 1871. Over this nearly 156-year period, it’s averaged a multiple of 17.4. As of Aug. 10, the S&P 500’s Shiller P/E was 42.37, or roughly 144% above its long-term average.
Statistically, the CAPE Ratio has been higher only one other time since the early 1870s. In the months leading up to the bursting of the dot-com bubble (March 2000), the CAPE Ratio reached its all-time high of 44.19 in December 1999. The current bull market has, thus far, peaked at a CAPE Ratio of 42.84 on June 1.
Wall Street knocking on the door of the priciest stock market in history isn’t a good thing.
Since January 1871, the S&P 500’s Shiller P/E Ratio has topped 30 during a continuous bull market six times, including the present. The previous five occurrences were all eventually followed by declines in the Dow, S&P 500, and/or Nasdaq Composite ranging from 20% to 89%.
The caveat to the above is that a Shiller P/E Ratio above 30 can’t help investors pinpoint when the music will stop or what catalyst will ultimately push the stock market over the edge. But what it does show is that premium stock valuations aren’t sustainable over long periods on Wall Street.
In other words, history says that Wall Street’s AI-fueled stock market is running on borrowed time.
Image source: Getty Images.
Statistically, long-term optimists rule the roost on Wall Street
But the funny thing about historical precedent is that an investor’s perspective can drastically change the outcome.
Although the CAPE Ratio can’t tell us precisely when a stock market correction, bear market, or crash will occur, we know that downturns are a normal and inevitable aspect of the investing cycle. On average, the stock market experiences a double-digit percentage decline roughly once per year.
However, stock market cycles aren’t linear — and this has massive implications for investors.
Toward the end of May, researchers at Bespoke Investment Group published a data set on X (formerly Twitter) that calculated and compared the calendar-day length of every S&P 500 bull and bear market since the start of the Great Depression in September 1929.
Despite the S&P 500 enduring 27 separate declines of at least 20% over the last 97 years, the average trough has occurred after just 286 calendar days, or roughly 9.5 months. Additionally, no bear market has ever lasted longer than 630 calendar days.
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
In comparison, Bespoke Investment Group’s data show that the average S&P 500 bull market has lasted approximately 3.6 times longer (1,023 calendar days). Furthermore, 14 of 27 bull markets have persisted longer than the lengthiest bear market.
Crestmont Research took its analysis a step further and examined the rolling 20-year total returns (including dividends) of the S&P 500 since the start of the 20th century. This meant tracking the performance of the S&P’s components to 1900, prior to the index’s creation in 1923.
Crestmont’s analysis yielded 107 rolling 20-year timelines (1900-1919, 1901-1920, and so on, through 2006-2025), all of which produced a positive annualized total return. No matter what Wall Street has thrown investors’ way (recessions, depressions, wars, pandemics, or inflation), the stock market has generated a positive annualized return, including dividends, over every rolling 20-year period since 1900.
Even if history rhymes and the second-priciest (or perhaps priciest) stock market in history loses 20% or more of its value on a peak-to-trough basis, optimistic long-term investors will be well-positioned, statistically, to profit.
