The Stock Market Sounds an Alarm for the First Time in Nearly 27 Years. Here Is What History Says the S&P 500 Will Do Next.
The S&P 500 (SNPINDEX: ^GSPC) has gained 12% so far in 2026, extending a bull market fueled mostly by enthusiasm around artificial intelligence (AI). However, the rally has not been without some turbulence. Both the S&P 500 and Nasdaq Composite (NASDAQINDEX: ^IXIC) recently witnessed sharp declines as investors grapple with sticky inflation, elevated bond yields, and concerns about how the AI revolution is being financed.
There’s another reason investors should be cautious. The CAPE ratio and Buffett indicator suggest the stock market is historically expensive. In fact, the CAPE ratio has climbed above 40, a level previously sustained only during the dot-com bubble.
Missed AI’s “Act 1”? Act 2 Could Be 14x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
Does this mean the stock market is about to crash? Read on to find out.
The CAPE ratio has approached dot-com territory
The cyclically adjusted price-to-earnings (CAPE) ratio was popularized by economist Robert Shiller. A conventional price-to-earnings (P/E) ratio compares stock prices with earnings over a single year. By contrast, the CAPE ratio divides the S&P 500’s price by the average of 10 years of inflation-adjusted earnings. By taking a longer-term view, CAPE readings smooth out fluctuations in profits affected by recessions or unusual booms.
Currently, the CAPE ratio hovers around 41, more than double its historical average of 17.8. Over 155 years worth of stock market data, the only other sustained period when the CAPE ratio exceeded 40 was during the dot-com bubble. It peaked around 44 in December 1999, shortly before technology stocks imploded.
Shiller CAPE Ratio data by YCharts
The Buffett indicator is flashing red
Another popular valuation metric is the Buffett indicator, aptly named after legendary investor Warren Buffett. The calculation is straightforward: Divide the total market capitalization of U.S. stocks by the country’s annual gross domestic product (GDP). Currently, the Buffett indicator sits around 237%. This means the stock market is valued at $2.37 for every $1 of annual U.S. economic output.
While that might suggest stocks are egregiously overvalued, there are important reasons today’s market differs from the dot-com era. For starters, many of today’s largest companies are incredibly profitable. Microsoft, Alphabet, Amazon, and Nvidia generate substantial revenue and cash flow. By contrast, many speculative internet companies that commanded astronomical valuations in the late 1990s never even generated sales, let alone turned a profit.
