Major market indexes have been soaring lately, with the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) up by 6%, 9%, and 4%, respectively, since late July alone.
However, no bull market can last forever, and multiple indicators are sounding the alarm over a potential stock market downturn: The S&P 500 Shiller CAPE ratio and the Buffett indicator are both showing patterns last seen during the dot-com bubble.
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While no market indicator can say with 100% certainty what will happen, investors may want to prepare for volatility. Here’s what history says investors should do right now.
How likely is a stock market crash in 2026?
As tech companies reach new heights, many investors and experts are growing concerned about an AI bubble. In fact, around 45% of fund managers believe an AI bubble is the biggest tail risk facing the market in 2026, according to Bank of America’s most recent Global Fund Manager Survey.
The data also suggests that investors may want to tread carefully. The S&P 500 Shiller CAPE ratio measures the S&P 500’s price against its 10-year inflation-adjusted earnings, providing a snapshot of the market’s valuation over time.
In the late 1990s, the CAPE ratio peaked at around 44. Until recently, that was the only period in history when this metric remained above 40 for months at a time. However, the CAPE ratio has now been hovering above 40 since May 2026.
The Buffett indicator, which was nicknamed after Warren Buffett when he used the metric to warn investors about sky-high valuations during the dot-com boom, also currently sits at a record high of around 232%.
This metric measures the relationship between the total value of U.S. stocks and GDP, and a high percentage suggests that the market may be overvalued. In a 2001 Fortune essay, Buffett warned that when this metric nears 200%, investors are “playing with fire.”
History says this is the best move investors can make right now
Perhaps the biggest downside of metrics like these is that, while they can provide information about the market’s overall valuation, they can’t predict when a downturn will begin.
The Buffett indicator, for example, has been above 200% since July 2025. Since then, though, the S&P 500 has earned total returns of more than 27%. In other words, investors who sat out of the market at the first sign of trouble would have missed out on significant gains.
