The Stock Market Has Done This Only Once Before in the Last 156 Years. What Happens Next Gets Ugly Fast.

Wall Street has developed an extraordinary tolerance for risk. Artificial intelligence spending continues to fuel market optimism, investors are betting on years of expanding corporate profits, and stock valuations reflect expectations that leave little margin for error. 

Meanwhile, elevated borrowing costs and persistent inflation threaten to undermine those assumptions. None of this means the bull market has run its course. 

However, underneath the market’s continued resilience, two historical warning signals are flashing simultaneously. One suggests investors are paying too much for future earnings; the other shows just how much borrowed money is riding on those expectations. Together, they present a combination investors have good reason to take seriously.

A Valuation Seen Only Once Before

According to the Case-Shiller PE Ratio’s historical data, the S&P 500 reached a 41.07 valuation yesterday, its second-highest valuation in 156 years of market history. Only November 1999, when the ratio reached 44.19, was higher.

Developed by Nobel Prize-winning economist Robert Shiller, the cyclically adjusted P/E (CAPE) measures stock prices against 10 years of inflation-adjusted earnings, smoothing out temporary economic fluctuations.

Here is how today’s reading fits into the historical narrative:

^{Source: Robert Shiller’s historical dataset and Multpl.com.}

Today’s market trades at approximately 2.35 times its historical average. More concerning, it exceeds the valuation recorded immediately before the 1929 market collapse and even the peak preceding the 2022 bear market.

The previous comparison is unsettling. Following the dot-com bubble, the S&P 500 declined 49% between March 2000 and October 2002, while the Nasdaq Composite lost approximately 78%.

Granted, today’s technology leaders, including Nvidia (NASDAQ:NVDA | NVDA Price Prediction), Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOGL), generate actual profits, unlike many internet companies that commanded extraordinary valuations in 1999.

Yet owning a wonderful business doesn’t automatically make its stock a wonderful investment at any price. At a CAPE of 41, investors are effectively paying $41 for every dollar of normalized annual earnings. That leaves precious little room for disappointing growth, shrinking margins, or interest rates remaining higher than anticipated.

Another Warning Makes This More Dangerous

Valuations aren’t the market’s only vulnerability. Investors are borrowing unprecedented amounts to buy stocks.

According to the Financial Industry Regulatory Authority (FINRA), margin debt climbed from approximately $851 billion in April 2025 to a record $1.502 trillion in June 2026 — a 77% increase in just 14 months.

Although borrowing subsequently retreated, August’s latest available reading of $1.454 trillion remained 37% above its year-earlier level.

Similar borrowing surges preceded three painful market reversals:

• 2000: Margin borrowing jumped 80% before the dot-com collapse.
• 2007: Debt increased 66% ahead of the financial crisis and the S&P 500’s subsequent 57% decline.
• 2021: Borrowing climbed 95% before the 2022 bear market.

The danger is that leveraged investors cannot always afford patience. Falling stock prices can trigger margin calls, forcing additional selling that accelerates an existing downturn.

Ironically, the same borrowing that helps propel stocks higher can become their undoing. A 20% decline in an unleveraged portfolio is painful but manageable for long-term shareholders. An investor using 50% borrowed money, however, could see approximately 40% of their original equity disappear from that same decline, excluding interest costs.

Key Takeaway

In short, the CAPE ratio signals historically expensive stocks, while elevated margin debt creates another potential source of selling pressure.

Neither indicator can reliably identify when a correction will begin. Indeed, expensive markets can remain expensive for years, and investors shouldn’t abandon long-term holdings simply because valuations are stretched.

However, this is an appropriate time to reduce leverage, rebalance concentrated technology positions, and maintain cash reserves for opportunities. Dollar-cost averaging into broad-market funds can also reduce the temptation to make an all-or-nothing market-timing decision.

Smart investors don’t need to predict the next crash. They need portfolios capable of surviving one — and the flexibility to buy when others are forced to sell.

Contact [email protected] for any questions or corrections.