With less than seven weeks to go before the curtain closes on 2025, it appears as if Wall Street's major stock indexes will be logging another banner year. Although the ride has been bumpy at times, the benchmark S&P 500 (^GSPC 0.38%), the iconic Dow Jones Industrial Average (^DJI 0.63%), and the growth stock-inspired Nasdaq Composite (^IXIC 0.13%) have all rocketed to respective all-time highs.
Over extended periods, it's perfectly normal for Wall Street's most prominent stock indexes to head higher. But over shorter time frames, directional moves can be more unpredictable. When volatility picks up, or stocks move too quickly in one direction, it's not uncommon for investors to rely on historical trends and correlated events as a guide to the future.
While no metric or correlative event can guarantee directional moves for the S&P 500, Dow Jones, and Nasdaq Composite, some tools and historical events have a phenomenal track record of forecasting what's next for stocks. One such event, which recently occurred for the first time in 26 years, makes crystal clear what comes next.
Image source: Getty Images.
The S&P 500 last did this shortly before the dot-com bubble burst
Wall Street's broad-based stock indexes have been rising at a breakneck pace -- and so have stock valuations. In recent months, I've highlighted the historical significance of select time-tested indicators reaching record or near-record levels.
For example, the S&P 500's Shiller Price-to-Earnings (P/E) Ratio, also known as the cyclically adjusted P/E Ratio (CAPE Ratio), recently achieved a peak multiple of 41.20 in the current bull market. It's the second-highest multiple during a continuous bull market dating back to January 1871.
Likewise, the "Buffett indicator" hit an all-time high in late October. This valuation measure, named after the soon-to-be-retiring CEO of Berkshire Hathaway, Warren Buffett, divides the total value of all public companies by U.S. gross domestic product (GDP). Whereas the Buffett indicator has averaged a reading of 85% (meaning the total value of stocks equates to 85% of U.S. GDP) when back-tested to 1970, this ratio recently topped 225%!
However, perhaps the most damning indictment of an expensive stock market comes courtesy of data highlighted by Jeff Weniger, CFA, Head of Equity Strategy at WisdomTree.
Last week the market achieved something last seen in 1999: the S&P 500 beat the S&P 500 Quality index by 11.5% over the prior six months. When this happened 26 years ago, the snapback was violent. pic.twitter.com/kCjtVo2xFt
-- Jeff Weniger (@JeffWeniger) November 11, 2025
As you'll note in the post above on X (formerly Twitter), Weniger brings attention to the gap in performance between the benchmark S&P 500 Index and the S&P 500 Quality Index over the last 31 years.
According to S&P Global, the S&P 500 Quality Index "is designed to track high-quality stocks in the S&P 500 by quality score, which is calculated based on returns on equity, accruals ratio, and financial leverage ratio." Whereas the "Magnificent Seven" make up a significant percentage of the S&P 500's weighting, the S&P 500 Quality Index has Apple as its top-weighted component, followed by historically safe stocks, such as Mastercard, Costco Wholesale, Visa, Procter & Gamble, and Coca-Cola, among the top 10, as of the end of October.
Typically, the S&P 500 and S&P 500 Quality Index generate similar returns over rolling six-month timelines. However, over the latest rolling six-month period, the S&P 500 Quality Index has underperformed the broad-based S&P 500 by 11.5%. The last underperformance of this magnitude (also 11.5%) occurred 11 months prior to the bursting of the dot-com bubble in March 2000.
By December 2000, the rolling six-month returns had shown a complete reversal, with a 20.6% outperformance for the S&P 500 Quality Index compared to the S&P 500. When historically pricey stocks with clear risks begin leading the way, this chart suggests trouble lies ahead.
Although it's impossible to predict when bubbles will form and burst on Wall Street, historical trends point to the artificial intelligence revolution, the rise of quantum computing, and Bitcoin treasury company euphoria, all eventually losing steam.
Image source: Getty Images.
Short-term peril leads to long-term promise
With a laundry list of valuation indicators pointing to trouble, it wouldn't be a surprise if a stock market correction, bear market, or even brief elevator-down move were to occur in the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. Thankfully, short-term peril tends to lead to long-term promise for investors who maintain their perspective.
Investors overestimating the adoption rate, utility, and early innings optimization of a new technology is nothing new. For three decades, beginning with the advent and proliferation of the internet, we've observed investors overshoot to the upside multiple times.
No matter how much investors wish against stock market corrections and bear markets, these are normal, healthy, and inevitable aspects of the investing cycle. But most of all, downturns represent ideal opportunities for long-term-minded investors to put their capital to work in high-quality stocks or exchange-traded funds (ETFs).
In June 2023, shortly after the S&P 500 had bounced 20% off its October 2022 bear market low and was confirmed to be in a new bull market, the analysts at Bespoke Investment Group posted the data set shown below. It details the calendar-day length of every S&P 500 bull and bear market dating back to the start of the Great Depression (September 1929).
It's official. A new bull market is confirmed.
-- Bespoke (@bespokeinvest) June 8, 2023
The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market saw the index fall 25.4% over 282 days.
Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
Over the nearly 94-year period examined by Bespoke, there were 27 separate bull and bear markets. The average S&P 500 bear market has lasted just 286 calendar days (roughly 9.5 months), and only eight out of 27 downturns persisted for at least one year.
On the other end of the spectrum, the average S&P 500 bull market endured for approximately 3.5 times as long (1,011 calendar days). Further, if the current bull market is extrapolated to the present day, 14 out of 27 S&P 500 bull markets have lasted longer than the lengthiest bear market (630 calendar days).
The nonlinear nature of economic cycles -- periods of economic growth last considerably longer than recessions -- allows the U.S. economy to grow over time, which also lifts corporate earnings. Although emotions can rule the roost on Wall Street over shorter periods, higher corporate profits for top-notch businesses provide a lift to stocks over the long run.
Regardless of the historical challenges that await Wall Street in the short term, the long-term future for equities remains bright.
