We’re Witnessing the Stock Market Do Something for Only the 3rd Time in 100 Years. History Says This Could Come Next
So far, 2026 has been a solid year for stock market investors, with the benchmark S&P 500 (SNPINDEX: ^GSPC) up around 11% year to date. This follows even bigger gains of 17.88% in 2025 and 25.02% in 2024. Optimism is largely being driven by generative artificial intelligence (AI), a technology trend that has seen many of America’s biggest tech companies pour hundreds of billions into data center infrastructure.
However, there are a growing number of warning signs in the stock market (and economy as a whole) that suggest this boom might be on its last legs. Let’s dig deeper to find out what could happen next.
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 »
Valuations are cause for concern
Over the long term, the stock market will consistently go up, but it is far from a smooth ride. Periodic drawdowns are a normal way for financial markets to remain grounded in economic reality. And the period before a big crash is usually marked by abnormally high valuations as measured by metrics like the cyclically adjusted price-to-earnings (CAPE) ratio.
The CAPE ratio now stands at 40.1 compared to its historic average of 17.4. In fact, over the last 100 years, this number has only substantially peaked three times. The first was in late 1929, when it hit 33 shortly before a stock market crash ushered in the Great Depression. The second time was in late 1999, shortly before the dot-com bubble burst. Both peaks preceded huge multi-year declines in equity prices.
The situation today has the most similarities with the dot-com bubble. Both rallies were driven by a transformational new technology with growth concentrated in this specific sector. According to CME Group, information technology now represents 40% of the S&P 500’s value, up from just under 7% in 1990. This extreme concentration means weakness in a relatively small number of companies could have a substantial negative impact on the performance of the entire index.
The bubble may already be popping
For clues about how this alarming situation may play out, investors should look at the example of South Korea. Like the US, this Asian nation has seen its stock market become totally dominated by the AI trade, with chipmakers like Samsung Electronics and SK Hynix representing more than half of the benchmark Kospi Index’s total capitalization.
