If you like volatility, then you've probably enjoyed the action in the stock market this year. The broader benchmark S&P 500 index (^GSPC 0.11%) started the year by reaching new highs in February. Then, following President Donald Trump's sweeping tariff announcements in early April, the market absolutely plummeted, falling 19% and almost entering bear market territory from highs in February. Trump's 90-day pause on tariffs to work on trade agreements with other countries sparked a stock market recovery, recouping most of the losses from early April. As of June 13, after everything that happened, the S&P 500 was up about 2.1% on the year.
While market uncertainty and the risks ahead remain elevated, one recent flashing economic signal with a perfect track record suggests the market will soar over the next five years.
Make no mistake, the market is expensive
Past results don't always mean the same thing will happen in the future. Investors should also understand that what makes investing and analyzing the market so difficult is that there can be conflicting data points indicating that market conditions are both rosy and on the brink of a huge downturn.
Image source: Getty Images.
Before we get to the flashing signal suggesting the market is about to soar, it's important to point out that the market is, on many accounts, overvalued. This shouldn't come as a surprise after superb returns in both 2023 and 2024, not to mention concerns about a recession or stagflation that could impact corporate earnings.
One metric that makes the S&P 500 look overvalued is the CAPE ratio (also known as the Shiller P/E ratio), which looks at the price of the S&P 500 divided by the index's 10-year inflation-adjusted earnings for the purpose of smoothing out volatility.
Data by YCharts.
As you can see above, dating back to 2000, the average CAPE ratio is about 27, while the CAPE ratio currently sits above 36. Another data point that would suggest the market is overvalued is the famous Buffett indicator, a metric heavily relied upon by the great Warren Buffett to see where valuations stand at any given moment. The Buffett indicator looks at the market cap of the Wilshire 5,000, which broadly represents the U.S. stock market, divided by gross domestic product.
Buffett typically considers a Buffett indicator of over 100% to mean the stock market is overvalued, although the Buffett indicator hasn't fallen below 100% since 2013. Recently, however, the Buffett indicator was hovering around 200%, near all-time highs.
The flashing signal
During all of the volatility experienced in April and May, one thing happened to the S&P 500 that doesn't happen all that often -- in fact, it's only happened 15 times since 1972. According to Charlie Bilello, the chief market strategist at Creative Planning, during the market's rebound in April, the S&P 500 rose 19.6% between April 8 and May 16, a period of 27 trading days.
The S&P 500 is up over 19% in the last 27 trading days, one of the greatest comebacks in market history. $SPX
-- Charlie Bilello (@charliebilello) May 17, 2025
Video: https://t.co/zvmjFV4imN pic.twitter.com/xwVxWCvWjR
This has now happened 15 times since 1972, and if you look at the data above, it's common for these rallies to occur during times of extreme turbulence. Many of these instances occurred around the Great Recession or during the COVID-19 pandemic.
In all 14 of the previous occasions, the S&P 500 found itself up an average of 140% over the next five years. In fact, the S&P 500 almost always found itself in the green on a three-month, six-month, one-year, two-year, three-year, four-year, and five-year basis following one of these events. The only time the S&P 500 found the red following one of these quick face-ripping rallies was three months after one occurred in November of 2008.
Now, several of these rallies occurred close together, so the data may be more concentrated than indicated, but the market has a perfect track record of soaring over the next five years after one of these intense rallies took place.
Investors should understand that while history often rhymes, it rarely repeats itself, which is why it's difficult to predict whether this positive data point or other more negative data points will accurately predict the future. However, the odds of making money when investing over a five-year time horizon are always pretty high.
