The stock market does something for only the sixth time in 156 years, and history says the next course of action is clear

• The stock market is in almost uncharted territory
• Historical precedent is based entirely on the investors’ perspective
• Where to invest $1,000 now

Despite some short-term periods of volatility, 2026 is shaping up to be another record year for the stock market. The timeless Dow Jones Industrial Average (^DJI +0.10%)reference S&P500 (^GSPC -0.40%)and powered by innovation Nasdaq Composite (^IXIC -0.91%) have reached several records, thanks to the construction of artificial intelligence (AI) infrastructure.

While history decisively shows that Wall Street’s major stock indexes rise over long periods of time, it also teaches us that bull markets are not indefinite and that when things seem too good to be true, they usually are.

Currently, we’re seeing the stock market do something for only the sixth time since January 1871 – and if history is anything to go by, what happens next is pretty clear.

Image source: Getty Images.

The stock market is in almost uncharted territory

At any given time, several headwinds are waiting in the wings to knock the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite off their respective pedestals. Current examples include the parabolic increase in outstanding margin debt, persistently high inflation, and the possibility of a bursting of the AI ​​bubble.

But among this long list of headwinds, none stands out more than premium stock valuations.

Since there is no single model for evaluating and valuing individual companies or the market as a whole, discussing value can be incredibly difficult. The subjectivity and emotion that comes into play when evaluating stocks or the market in general is what makes accurately predicting short-term movements so difficult.

Most investors rely on the price-to-earnings (P/E) ratio to quickly assess the price or relative price of a public company or the market as a whole. Unfortunately, the traditional P/E ratio is not perfect. For example, it loses its usefulness if corporate profits become negative during a recession.

This is where the stock market’s most proven valuation tool comes in handy: the S&P 500’s Shiller P/E ratio, also known as the cyclically adjusted P/E ratio (CAPE ratio). Since the Shiller P/E ratio is based on inflation-adjusted average earnings over the past 10 years, a recession will not render this valuation tool useless.

Shiller’s PE ratio on the verge of breaking its Dot Com bubble all-time high 🚨 🤯 👀 https://t.co/CtCmSgWnLt

— Bar Chart (@Barchart) July 11, 2026

When backtested through January 1871, the Shiller P/E ratio of the S&P 500 averaged 17.45. As of the November 10 close, it stood at 39.70, 128% above the long-term average.

While value is a tricky subject to talk about, history has consistently shown that bad things happen when the CAPE ratio rises above 30. The stock market has crossed this arbitrary line in the sand six times in the last 156 years, including today, and the previous five have all ended badly for stocks:

• August to September 1929: A parabolic rise in valuations occurred just before the Great Depression took shape and ultimately wiped out 89% of the value of the Dow Jones Industrial Average.
• June 1997 to August 2001: The CAPE ratio recorded its all-time high of 44.19 in December 1999, just months before the dot-com bubble burst. The S&P 500 and the Nasdaq Composite lost 49% and 78% of their respective values ​​after the dot-com bubble burst.
• September 2017 to November 2018: The third time the CAPE ratio exceeded 30, the S&P 500 fell approximately 20% during the fourth quarter of 2018.
• December 2019 to February 2020: The Shiller P/E ratio surpassed 30 just before the COVID-19 pandemic hit, erasing 34% of the overall value of the S&P 500 in just 33 calendar days.
• August 2020 to May 2022: Fiscal stimulus checks fueled risk-taking during the pandemic, briefly pushing the CAPE ratio above 40 during the first week of January 2022. The ensuing bear market in 2022 caused the Dow, S&P 500, and Nasdaq Composite to fall by about a fifth, a quarter, and a third, respectively.
• November 2023 to present: The AI ​​revolution pushed the CAPE ratio up to 42.84 in early June 2026.

History clearly shows that premium valuations lack sustainability. While the Shiller P/E ratio doesn’t help determine when the stock market will peak or what catalysts will push stocks over the edge, it has a flawless, back-tested 156-year history of foreshadowing significant declines in the Dow, S&P 500, and Nasdaq Composite.

Image source: Getty Images.

Historical precedent is based entirely on the investors’ perspective

Even though the story presents a relatively dire outlook for investors, the positive side is that the outcome can change depending on investors’ views. Although the next few quarters could turn out to be bleak, the long-term outlook for stocks has arguably never been brighter.

For example, history shows that stock market corrections and bear markets are inevitable aspects of the investment cycle. No amount of goodwill can prevent these double-digit recessions, which are often emotionally driven.

But history also shows that stock market corrections and bear markets tend to be short-lived.

In late May, analysts at independent research firm Bespoke Investment Group released a dataset on

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 market that ended on 02/9/1966: https://t.co/4mGsS2t2ft

– Custom (@bespokeinvest) May 30, 2026

According to Bespoke Investment Group, the average S&P 500 bear market lasted 286 calendar days (about 9.5 months) over the previous 97 years. Additionally, none of the 27 bear markets exceeded 630 calendar days.

For comparison, the typical S&P 500 bull market persisted for 1,023 calendar days, approximately 3.6 times longer than the average S&P 500 bear market, with 14 of the 27 bull markets lasting more than 630 calendar days.

While there is no magic predictive tool that can consistently tell us when stock market declines will begin, history has repeatedly shown that staying the course and investing in large declines is a winning strategy for optimistic, long-term investors. Even if history repeats itself and the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite plunge at least 20% in the not-too-distant future, patient investors will be well-positioned for success.