It’s an exciting time in the stock market. Investors are racing to invest in SpaceX stock, which could reach a valuation of $2 trillion. Meanwhile, artificial intelligence stocks continue to hit new highs, fueling speculative new adjacent markets like the market for small modular nuclear reactors.
When you pay closer attention, however, something troubling is happening. In fact, the stock market is doing something right now that it has only done three other times in the past 156 years. Markets have now done this four total times, and history is clear about what happens next. Hint: It’s not pretty.
Time to panic over this scary stock market warning signal?
The State Street SPDR S&P 500 ETF Trust (SPY 0.39%) is one of the largest exchange-traded funds (ETFs) on the planet today. The investment vehicle tracks the S&P 500 index, which itself tracks the stock price performance of the largest 500 companies in the U.S.
Since 2026 began, S&P 500 ETFs have largely gained more than 5%. At this pace, it should be another double-digit year in the green for the stock market overall. But, of course, down years do occur occasionally. The biggest down years occur after sharp market peaks.
The sharpest peaks have occurred at the tops of bubbles. In the months that followed the 1999 dot-com bubble, the 2007 financial crisis, and the 2020 flash crash, stock markets sank deeply into the double digits, at times falling by more than 40%.
Image source: Getty Images.
Here’s the worrisome part: In all three of those instances, the average price-to-earnings ratio of the S&P 500 surpassed 30 — something it had never done in the century prior. Economists argue that higher valuations make sense in a more capital-rich world with higher corporate profit margins. But markets have always crashed within a year of surpassing the 30-times-earnings mark.
Last month, the S&P 500 once again passed this ominous threshold. But here’s the thing: You shouldn’t panic.
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No one knows exactly when the next crash will occur. It could happen tomorrow or a year from now. And there’s no guarantee that one will occur anytime soon at all — even if history does suggest it. Plus, stock market peaks aren’t bad times to invest if you have a long enough time horizon. If you’d invested at the absolute peak of all the aforementioned bubbles, you still would have booked healthy profits since. As legendary investor Warren Buffett once said, “The stock market is a device to transfer money from the ‘impatient’ to the ‘patient.'”
So yes, market valuations look steep. And there’s reason to believe another market crash could be around the corner. But that shouldn’t stop patient investors from continuing to put money to work. In other words, stay patient.
