Over the past decade, the S&P 500 index (^GSPC +1.18%) has produced a total return of 330%, or 15.7% on a yearly basis. This is significantly better than its long-term average of 10% annualized.
Investors have had plenty to cheer about. And it seems that not a week goes by without the benchmark hitting a fresh all-time high.
After such a wonderful performance, though, is the stock market flashing a warning sign? And what does it tell us about returns going forward?
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Are investors doomed?
The best investors don't ignore valuation. The S&P 500 index's cyclically adjusted price-to-earnings (CAPE) ratio, which looks at the average of trailing-10-year company earnings adjusted for inflation, is currently at 42. The last time it was this high, and the only other time since 1871 that it was this elevated, was during the dot-com bubble era in 1999 and 2000.
It's safe to say that from a historical perspective, the stock market is expensive. According to analysis done by investment management firm Invesco, past data suggests that annualized returns over the next decade will be negative.
SNPINDEX: ^GSPC
Key Data Points
Optimists make money
The immediate takeaway investors will have is to abstain from putting money to work in the stock market. The pessimism makes sense. It seems like the smart move would be to wait until valuations come down, with the hope of getting in at a more attractive entry point.
However, I believe this is the wrong course of action. Investors should remain optimistic, and still consider allocating capital to stocks.
That's because the equity market in 2026 is structurally different than it was in the past. In 2023, money in passive funds exceeded that in active funds for the first time. This trend, which shows no signs of reversing, creates durable demand that drives market prices higher.
The second difference comes from the rise of the booming technology sector. Some of the most dominant businesses on Earth -- which sell products and services globally, post strong growth, generate huge profits, and possess wide economic moats -- are driving returns. They generally deserve their sizable market caps.
And lastly, fiscal and monetary policies have resulted in ongoing currency debasement. The M2 money supply, which includes money in checking, savings, and money market accounts in the U.S., has ballooned by 168% since the Great Recession ended in June 2009. This leads to more capital flowing into stocks, leading to inflation of asset prices.
The CAPE ratio appears to be a warning signal. Investors should still be bullish about the long term, though.
