For more than a century, the stock market has stood tall as the premier wealth creator, with stocks generating a higher average annual return than bonds, commodities, and real estate. But getting from Point A to B can often be an adventure.<\/p>\n
Just five months ago, the unveiling of President Donald Trump’s tariff and trade policy sent the benchmark S&P 500 (SNPINDEX: ^GSPC), growth-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC), and ageless Dow Jones Industrial Average (DJINDICES: ^DJI) spiraling lower. The S&P 500 endured its fifth-steepest two-day percentage decline since 1950<\/a>, while the Nasdaq Composite plummeted into its first bear market in three years.<\/p>\n However, sentiment on Wall Street can shift at the drop of a hat. Since President Trump announced a 90-day pause on higher “reciprocal tariffs<\/a>” on April 9, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have been off to the races, with all three indexes achieving multiple record-closing highs.<\/p>\n But this euphoria may soon be coming to an end, if history has its say.<\/p>\n To preface the following discussion, historical precedent can’t concretely guarantee what’s going to happen in the future. If there was a metric or correlative event that could guarantee directional moves in the stock market, every investor would be using it by now.<\/p>\n With this being said, the stock market is making history on the valuation front — and not in a good way.<\/p>\n Value tends to be a subjective term that varies from one individual to the next. What you consider to be expensive might be viewed as a bargain by another investor. This dynamic is one of the reasons the stock market can be so unpredictable.<\/p>\n When most investors “value” a stock, they turn to the time-tested price-to-earnings ratio (P\/E), which is arrived at by dividing a company’s share price by its trailing-12-month earnings per share (EPS). The P\/E is a quick and easy way to evaluate mature businesses, but it’s not without its faults. This traditional valuation measure doesn’t account for a company’s growth rate, and it can be rather useless during recessions and shock events (e.g., the pandemic).<\/p>\n When back-tested, arguably no valuation tool provides a more-encompassing, apples-to-apples comparison of stock valuations than the S&P 500’s Shiller P\/E ratio, which is also referred to as the cyclically adjusted P\/E ratio (CAPE ratio).<\/p>\n The Shiller P\/E is based on average inflation-adjusted EPS over the trailing decade. This means short-lived recessions and shock events won’t skew valuation multiples.<\/p>\n With the S&P 500 crossing above 6,500 for the first time in its storied history on Aug. 28, the Shiller P\/E ratio closed at 39.18, which is its high-water mark for the current S&P 500 bull market. There are only two other periods spanning 154 years when the Shiller P\/E has been higher:<\/p>\n During the first week of January 2022, the S&P 500’s Shiller P\/E surpassed 40 by a few hundredths.<\/p>\n In December 1999, the Shiller P\/E hit its all-time high of 44.19.<\/p>\n Historical precedent comes into play when examining what has happened to stocks following these previous periods of premium valuations. The 2022 bear market wiped out a quarter of the S&P 500’s value and lopped off more than a third of the Nasdaq’s value.<\/p>\n Meanwhile, the dot-com bubble, which took shape just months after December 1999, saw the S&P 500 and Nasdaq Composite lose 49% and 78%, respectively, on a peak-to-trough basis.<\/p>\n In fact, any instance in which the S&P 500’s Shiller P\/E ratio has surpassed and sustained 30 for a period of at least two months has been a harbinger of significant downside. The S&P 500, Dow Jones, and\/or Nasdaq Composite lost between 20% and 89% of their value following the five previous occurrences of the Shiller P\/E topping 30.<\/p>\n With the stock market closing in on its second-priciest valuation since January 1871, history couldn’t be clearer on what’s to eventually come.<\/p>\n But there’s a big difference in attempting to forecast short-term directional moves for Wall Street’s major stock indexes and widening the lens to look at the big picture. While the Shiller P\/E has an immaculate track record of forecasting eventual bear market downturns, few (if any) asset classes have proved more resilient over multiple decades than stocks.<\/p>\n The nonlinearity of economic and stock market cycles is one of the most-powerful catalysts working in favor of long-term investors.<\/p>\n For example, approximately 80 years have passed since the end of World War II. Since September 1945, the U.S. has navigated its way through a dozen recessions. The average recession has endured just 10 months, and none of these 12 downturns stuck around for longer than 18 months.<\/p>\n On the other end of the spectrum, the typical period of economic growth has endured for about five years, with two expansions surpassing the 10-year mark. Short-lived downturns and extended periods of growth are favorable to corporate EPS expansion over time.<\/p>\n This disparity between optimism and pessimism is even more apparent in the stock market.<\/p>\n In June 2023, the analysts at Bespoke Investment Group published a data set on X (formerly Twitter) that examined the calendar length of every bull and bear market in the S&P 500 dating back to the start of the Great Depression in 1929.<\/p>\n Bespoke found the average S&P 500 decline of 20% or greater lasted just 286 calendar days, or approximately 9.5 months. But over this nearly 94-year stretch, the typical bull market was sustained for 1,011 calendar days, or two years and nine months.<\/p>\n While it’s anyone’s guess what might happen to stocks a month, six months, or even a year from now, patience and perspective have proved invaluable to investors willing to look to the horizon. The S&P 500 has never been down over any rolling 20-year period, including dividends, which is a strong endorsement for the U.S. economy and stocks in the decades to come.<\/p>\n Before you buy stock in S&P 500 Index, consider this:<\/p>\n The Motley Fool Stock Advisor analyst team just identified what they believe are the\u00a010 best stocks<\/a> for investors to buy now\u2026 and S&P 500 Index wasn\u2019t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.<\/p>\n Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation,\u00a0you\u2019d have $651,599!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you\u2019d have $1,067,639!*<\/p>\n Now, it\u2019s worth noting\u00a0Stock Advisor\u2019s total average return is 1,049% \u2014 a market-crushing outperformance compared to 185% for the S&P 500. Don\u2019t miss out on the latest top 10 list, available when you join Stock Advisor.<\/p>\n See the 10 stocks \u00bb<\/a><\/p>\n *Stock Advisor returns as of August 25, 2025<\/p>\n Sean Williams<\/a> has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy<\/a>.<\/p>\n Image source: Getty Images. <\/p>\n
<\/a> S&P 500 Shiller CAPE Ratio<\/a> data by YCharts<\/a>. <\/p>\n
Image source: Getty Images. <\/p>\n