The bulls make money. The bears lose money. The stock market keeps proving it pays to be optimistic. In 2026, the S&P 500 (^GSPC +0.09%) has risen by 12% (as of Aug. 26). Should it maintain this gain, this will be the fourth straight year the benchmark posted a double-digit calendar return.
But it’s time to take a step back and see the present situation clearly. The stock market is doing something not seen in more than a quarter-century. Here’s what history suggests is coming next for Wall Street.
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Expensive by any measure
In 1988, economist Robert Shiller developed the cyclically adjusted price-to-earnings (CAPE) ratio to more accurately assess valuation. It’s a popular tool used today.
Right now, the S&P 500 trades at a CAPE ratio of almost 42. It has expanded by 57% in the past decade. And over the past 155 years, it has only been above 40 during one other time. This was the technology-driven dot-com bubble era of 1999 and 2000. Any market historian would agree that this period was marked by extreme investor speculation.
From the start of 2000 to the end of 2009, a 10-year period that directly followed the late innings of the internet boom, the S&P 500 generated a negative total return of 9%. This was a lost decade. History suggests that the stock market will put on a similar performance between now and 2036.
Let’s say you no longer believe the CAPE ratio is an accurate measure of valuation. Another tool to use is the Buffett indicator, a data point introduced by the Oracle of Omaha in 2001. This figure shows the total U.S. stock market capitalization relative to the country’s GDP. Right now, it’s at 237%. This is the highest reading on record.
It appears that no matter what measure you use, the stock market is expensive. All else equal, a higher starting valuation reduces the margin of safety and raises the probability of lower future returns. This is a basic principle in value investing.
Today’s Change
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It pays to be a long-term bull
Investors who understand this information will come away with a clear lesson. Maybe it’s not a smart idea to invest in an S&P 500 fund, such as the Vanguard S&P 500 ETF (VOO +0.07%). The best move might be to wait for a sizable pullback before putting money to work at a more attractive valuation.
This sounds like an intelligent strategy. However, there are compelling reasons to remain bullish over the long term. First, there’s no rule that the CAPE ratio can’t keep expanding. Exactly 10 years ago, it was at 26.7, an expensive measure based on historical data. But the S&P 500 went on to generate a 317% total return in the last decade. And as mentioned, it’s on pace for a fourth consecutive double-digit gain.
The stock market in 2026 is structurally different than at any point in the past. At the end of 2023, money in passive funds exceeded that in active funds for the first time. This trend introduces fresh capital into the mix, raising demand for stocks and pushing asset prices higher. It’s a powerful and durable tailwind.
It’s also impossible to ignore the rise of the technology sector, which accounts for 37% of the Vanguard S&P 500 ETF. Some of these companies are easily the most dominant the world has ever seen. And it looks like they have bright futures ahead. Their success warrants higher valuation multiples.
You might think the ideal move is to try to time the market. But real wealth is made by investing early and often. Even investors who buy in at a CAPE ratio of 42 should be rewarded in the very long run.
