The last three years have been quite pleasant for growth investors. Thanks to advances in artificial intelligence (AI), the technology sector has witnessed a once-in-a-generation boom that’s spread to other industries across energy, industrials, utilities, and more. As such, it’s been pretty hard to lose money in the stock market in recent years.
Unfortunately, the euphoria train seems to have hit a hiccup in 2026. So far this year, the S&P 500 (SNPINDEX: ^GSPC) has gained less than 2% while the Nasdaq Composite is unchanged.
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Let’s dig into what’s causing the markets to take a breather. From there, we will dig into the strategies smart investors are employing to help weather current market conditions.
If you tune into financial news talk shows, it’s common to hear economists and equity research analysts talk about valuation metrics. For instance, analysts love comparing a company’s price-to-earnings (P/E) ratio relative to historical periods to help gauge whether the stock is overvalued or undervalued.
Although this approach can make sense, one of its flaws is that it does not fully account for anomalies such as periods of unusually high inflation or one-time line items that can benefit (or hurt) a company’s earnings growth.
For this reason, smart investors turn to a different metric to help assess current market conditions. The cyclically adjusted price-to-earnings (CAPE) ratio, developed by economist Robert Shiller, accounts for a decade’s worth of earnings relative to stock performances over that time frame. In this sense, economic outliers become smoothed out and investors are able to achieve a more normalized look at valuation.
Right now, the S&P 500 Shiller CAPE ratio is hovering just below 40. The only other time the CAPE ratio was close to its current level was just before the dot-com bubble burst. With this overlap in mind, some investors are wary that history is poised to repeat itself and the stock market is warning us of another 1999 in the making.
On the surface, it’s easy to call the current AI revolution a stock market bubble given its similarities to soaring stock prices from the late 1990s. While I understand the comparison, I see the AI rally as quite different from the dot-com boom.
