Wall Street's bull market rally lived up to the hype in year three. When the curtain closed for 2025, the ageless Dow Jones Industrial Average (^DJI 1.27%), benchmark S&P 500 (^GSPC 1.16%), and growth stock-powered Nasdaq Composite (^IXIC 1.44%) had catapulted higher by 13%, 16%, and 20%, respectively, with all three indexes reaching several record-closing highs.
Investors have had plenty to be excited about, including the rise of artificial intelligence, the advent of quantum computing, the ongoing rate-easing cycle, better-than-expected corporate earnings, and record share buybacks from S&P 500 companies.
But if 27 years of investing have taught me anything, it's that when things seem too good to be true, they typically are.
Image source: Getty Images.
Although what's happened in the past can't guarantee what's to come for the stock market, history has a way of rhyming on Wall Street. In other words, certain correlations tend to have a high degree of accuracy over time. One such forecasting tool, which has flawlessly predicted short-term stock market moves under a select set of circumstances when back-tested over 155 years, points to Wall Street's benchmark index, the S&P 500, losing at least 33% of its value.
This time-tested valuation indicator has never been wrong
While there's never any shortage of headwinds for Wall Street's major indexes, arguably none stands out more profoundly at the moment than stock valuations.
Value is, itself, an inherently subjective term. Since there's no concrete blueprint for evaluating and valuing stocks, what you find to be pricey might be considered a bargain by another investor. This subjectivity, when coupled with the emotional aspects of investing, is what makes the stock market so unpredictable over the short term.
When most investors evaluate a publicly traded company, they'll usually opt for the time-tested price-to-earnings (P/E) ratio or the forward P/E ratio as their go-to measures of value. The traditional P/E ratio and forward P/E ratio factor in 12 months' worth of earnings history.
However, the S&P 500's Shiller P/E Ratio, which is also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), is better suited to evaluate the overall cheapness or priciness of the broader market. The Shiller P/E is based on average inflation-adjusted earnings over the prior 10 years. Factoring in a decade of earnings history ensures this valuation tool remains useful during recessions, which can't necessarily be said for the traditional P/E ratio.
The CAPE Ratio makes it crystal clear that the stock market is historically pricey. When back-tested to January 1871, the Shiller P/E has averaged 17.33. As of the closing bell on Feb. 3, 2026, the S&P 500's Shiller P/E clocked in at 40.32.
S&P 500 Shiller PE Ratio hits 2nd highest level in history 🚨 The highest was the Dot Com Bubble 🤯 pic.twitter.com/Lx634H7xKa
-- Barchart (@Barchart) December 28, 2025
Statistically, history tells us that a valuation premium of this magnitude isn't sustainable. Over the previous 155 years, there have been six instances in which the CAPE Ratio exceeded 30 for a period of at least two months during a bull market, including the present. The prior five occurrences all saw the Dow Jones Industrial Average, S&P 500, and/or Nasdaq Composite eventually lose 20% to 89% of their value.
Here's the quirk with the Shiller P/E: While it isn't helpful in deciphering when stock market corrections, bear markets, or elevator-down moves will begin, it may offer investors a good idea of how far Wall Street's major indexes will plunge once the selling commences.
Based on the five previous declines following a Shiller P/E above 30, this time-tested valuation tool has never bottomed out at a multiple higher than 27. To reach a Shiller P/E of 27, the bare minimum drop expected in the benchmark S&P 500 is 33%. This would send the S&P 500 back to the 4,600 range after recently touching 7,000.
While history can't guarantee anything for investors, the Shiller P/E has, thus far, a flawless track record of forecasting the future when it surpasses 30. This presents a worrisome scenario for Wall Street that investors would be wise not to ignore.
Image source: Getty Images.
The stock market's long-term outlook remains promising
The interesting thing about historical precedent is that it works both ways. In addition to a historically pricey stock market portending trouble in the presumed not-too-distant future, past events also point to the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite eventually climbing to fresh all-time highs.
Even though investors don't (typically) look forward to stock market corrections, bear markets, or crashes, these are normal, healthy, and inevitable aspects of the investing cycle. No level of fiscal or monetary policy maneuvering can stop these often emotion-driven downturns from occurring.
The saving grace for investors is that boom-and-bust cycles on Wall Street aren't linear.
Between the start of the Great Depression (September 1929) and the confirmation that the S&P 500 had entered its latest bull market (June 2023), there were 27 separate bull market advances and bear market declines in the broad-based S&P 500. According to calculations from analysts at Bespoke Investment Group, these advances and pullbacks differed dramatically.
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
Only eight out of 27 S&P 500 bear markets reached the one-year mark over this nearly 94-year timeline, and none lasted longer than 630 calendar days. Further, the average bear market hit its trough after 286 calendar days, or approximately 9.5 months.
Meanwhile, 10 out of 27 S&P 500 bull markets have endured more than 1,200 calendar days, including the current bull market when extrapolated to the present day. The average S&P 500 bull market has lasted 1,011 calendar days (as of June 2023) and generated a return of 114.4%!
What this data set makes clear is that, given the proper time and perspective, optimism rules the roost on Wall Street. Even if history repeats and the Shiller P/E accurately forecasts a 33% (or greater) plunge in the benchmark S&P 500, nearly a century of bull-and-bear-market return data suggests this decline will be relatively short-lived and eventually give way to a rip-roaring bull market.
