The Stock Market Is on the Verge of Doing Something That No One’s Witnessed Dating Back to Nearly the U.S. Civil War — and It Has Alarming Implications

Despite bouts of heightened volatility on Wall Street, it’s turned into another stellar year for equities. Since early June, the time-tested Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-stock-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC) have all romped to record highs.

No single factor is responsible for these gains. Rather, it’s a confluence of catalysts pushing the broader market higher, including (but not limited to):

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• The evolution of artificial intelligence (AI)

• Better-than-expected corporate earnings

• Record share repurchase activity by S&P 500 companies (in 2025)

• Initial public offering (IPO) excitement

• Buzz surrounding high-profile stock splits

While the Dow, S&P 500, and Nasdaq Composite have decisively risen over multiple decades, their short-term directional movements are considerably more challenging to predict. This is where historical precedent can come in handy.

Although history can’t guarantee what’s to come, certain events have better track records of forecasting the future than others. At present, the stock market is on the verge of doing something that no one has witnessed dating back to nearly the U.S. Civil War — and this event has a, thus far, immaculate track record of foreshadowing trouble for Wall Street.

The stock market is on the doorstep of making dubious history

Wall Street’s record books are rewritten from time to time. Just last month, Elon Musk’s Space Exploration Technologies (SpaceX) booted Saudi Aramco from its pedestal and became the largest-ever IPO in Wall Street’s history, raising $85.7 billion, including the underwriters’ overallotment option.

But not all records are necessarily desirable for the stock market or investors. While the AI infrastructure build-out is driving investor euphoria on Wall Street, it’s also pushed stock valuations to nearly never-before-seen levels.

Before diving in, let’s address the elephant in the room: “value.” Without a one-size-fits-all blueprint for valuing individual companies and/or the broader market, valuations tend to be subjective and potentially driven by investors’ emotions. In other words, what one investor finds pricey might be viewed as a bargain by another.

Traditionally, investors rely on the price-to-earnings (P/E) ratio to value companies or the broader market. While the P/E ratio, which accounts for trailing 12-month (TTM) earnings per share (EPS), is a fantastic tool for evaluating mature businesses, it can lose its usefulness during recessions if EPS turns negative.

The valuation tool that’s proven capable of pushing beyond subjectivity, emotion, and TTM EPS is the S&P 500’s Shiller P/E Ratio, which is also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio). The Shiller P/E is based on average inflation-adjusted EPS over the trailing decade, ensuring that short-lived recessions can’t offset its usefulness.

Economists first introduced the CAPE Ratio in the late 1980s. However, it’s been backtested to January 1871 — roughly 4.5 years from when President Andrew Johnson signed a formal proclamation declaring the end of the U.S. Civil War in August 1866.

Over the last 155 years and nearly seven months, the Shiller P/E Ratio has averaged approximately 17.4. As of early June, this iconic valuation index reached 42.84, or roughly 146% above its 155-year average.

To put this figure into context, there’s only been one other time in the history of the U.S. stock market where, according to the CAPE Ratio, equities have been pricier. In the months leading up to the bursting of the dot-com bubble, the S&P 500’s Shiller P/E peaked at 44.19 in December 1999.

Widening the lens a bit further, there are only six instances of the CAPE Ratio topping 30 during a continuous bull market stretching back to the early 1870s. Excluding the present case, the previous five all resulted in eventual disaster for equities.

After a brief stint above 30 from August to September 1929, the Great Depression took shape and eventually wiped away 89% of the Dow Jones Industrial Average’s value. Meanwhile, during the dot-com bubble, the S&P 500 and Nasdaq Composite shed 49% and 78% of their respective values. The point being that CAPE Ratios above 30 have consistently resulted in the Dow, S&P 500, and/or Nasdaq losing 20% (or far more) of their value.

This more than century-long streak favors optimistic investors

History won’t always be an ally to investors over shorter timelines. However, altering your perspective can drastically change whether history is perceived as a foe or a friend.

Although Wall Street has spent the majority of the last 17 years (i.e., since the end of the financial crisis) in rip-roaring bull markets, it’s important to recognize that the stock market is cyclical. Corrections, bear markets, and even those pesky emotion-driven elevator-down events are normal, healthy, and inevitable.

But just because red arrows are inevitable, it doesn’t mean bull and bear market events are mirror images of each other.

According to data published on social media platform X by Bespoke Investment Group, there’s a notable disparity between S&P 500 bull and bear markets. Since the start of the Great Depression (September 1929), the average of 27 S&P 500 bear markets has lasted only 286 calendar days, or the equivalent of 9.5 months.

On the other hand, the typical bull market has persisted for 1,023 calendar days, or roughly 3.6 times longer than the average 20% (or greater) downturn in the benchmark index.

The analysts at Crestmont Research took things even further and widened their performance analysis to the start of the 20th century. Crestmont calculated the rolling 20-year total returns, including dividends, of the S&P 500 (1900-1919, 1901-1920, and so on, to 2006-2025).

Crestmont’s analysis yielded 107 rolling 20-year timelines, all of which generated a positive annualized total return. Hypothetically (since S&P 500-tracking exchange-traded funds didn’t exist on U.S. exchanges until 1993), if an investor had purchased an S&P 500 index fund at any point between 1900 and 2006 and simply held for 20 years, they would have generated a positive return 100% of the time. Regardless of wars, pandemics, hyperinflation, recessions, or depressions, the S&P 500 ultimately grew investors’ wealth over every rolling 20-year period.

Even though the stock market is on the verge of doing something that’s never occurred, nearly looking back as far as the U.S. Civil War, more than a century of history shows that optimistic investors are consistently rewarded for their patience.

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Sean Williams 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.

The Stock Market Is on the Verge of Doing Something That No One’s Witnessed Dating Back to Nearly the U.S. Civil War — and It Has Alarming Implications was originally published by The Motley Fool