U.S. equities have been extending gains across major indexes, with the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite reaching record highs this year as investors look through a dense set of earnings and technology-driven catalysts. Still, some market history-based valuation signals are flashing, suggesting downside risk could rise if premium prices persist.
According to a recent analysis drawing on long-run valuation research, the market’s current stretch of strength is being supported by artificial intelligence infrastructure investment, corporate earnings that have come in stronger than expected, elevated share buybacks, and robust initial public offering activity. At the same time, the report points to the S&P 500’s Shiller price-to-earnings measure—also known as the cyclically adjusted P/E or CAPE ratio—sitting in territory that has historically preceded bear markets.
Key takeaways
- Price move: The Dow, S&P 500 and Nasdaq Composite have pushed to multiple record highs this year.
- Catalyst: Investors have cited momentum from artificial intelligence infrastructure build-outs alongside better-than-expected corporate earnings, record S&P 500 repurchases and strong IPO activity.
- Valuation warning: The S&P 500’s CAPE ratio reached 41.60 at the close on Sept. 21, a level the analysis says has appeared only three times in roughly 156 years.
- Key implication: The historical pattern suggests that sustaining elevated valuations can be associated with eventual bear markets, increasing the case for long-horizon discipline rather than short-term timing.
What drove the rise in major U.S. indexes
The report attributes the market’s momentum to several overlapping drivers. It highlights ongoing artificial intelligence infrastructure investment as a core theme behind broader equity participation, not just narrow exposure to AI chip demand. It also points to corporate earnings results that have exceeded expectations, which has helped reinforce confidence that profitability can support current market levels.
In addition, the analysis cites record share repurchases by companies in the S&P 500, a factor that can provide a structural bid by reducing share counts even as earnings growth fluctuates. Finally, it points to “history-making” IPO activity as another signal that risk appetite has remained firm and capital is continuing to flow into public markets.
Market reaction and the valuation signal investors are watching
While the record-high run has kept headlines focused on strength, the analysis argues that it may be incomplete to view the rally in isolation. It notes that valuations remain a key risk variable, especially for broad indexes where price movements can outpace fundamental support.
The central metric in the piece is the S&P 500’s Shiller P/E (CAPE) ratio, a valuation tool constructed from average inflation-adjusted earnings over the prior decade. The report emphasizes that using a 10-year earnings window is meant to reduce the distortions that can occur when short-term earnings weaken during recessions.
According to the report, the CAPE ratio has been backtested to January 1871, and the long-run average is 17.42. It further states that, including the present, the index has only cleared 40 three times over the roughly 156-year span—an inflection level that, in the report’s recounting, has been followed by notable bear markets.
The three historical episodes cited
- Late 1990s to 2000: The report says the Shiller P/E reached a record high of 44.19 in December 1999, months before the dot-com bubble burst. It then cites subsequent declines in the S&P 500 and Nasdaq Composite through October 2002.
- Early 2022: The report states that for a brief period in the first week of 2022, the CAPE ratio exceeded 40, followed by the 2022 bear market.
- May 2026 to present: The report says the Shiller P/E has been consistently above 40 since May 2026, even though it briefly poked above the threshold earlier at different points during the prior year and earlier this year.
In the report’s framing, the implication is straightforward: premium valuations have tended to be poorly tolerated over extended periods. That does not guarantee an immediate downturn, but it can change the risk-reward equation for investors contemplating how much to pay for future earnings growth.
Why long-horizon investors may still benefit from volatility
The analysis acknowledges that the same historical data that warns about drawdowns can be frustrating for investors who try to time market turns. It argues, instead, for separating short-term trading from long-term portfolio construction.
To support that perspective, the report cites research from Bespoke Investment Group on the asymmetry between bear market and bull market durations. It states that the average bear market trough has historically arrived in about 286 calendar days (roughly 9.5 months), while the typical S&P 500 bull market has lasted about 1,023 calendar days—about 3.6 times as long.
It also references analysis from Crestmont Research, which examined rolling 20-year total returns for the S&P 500 from 1900 through 2025 using component-based reconstruction prior to the index’s formal existence. The report says there were 107 rolling 20-year periods through 2025 and that all 107 produced positive annualized returns. Put differently in the report’s description, if an investor had bought an S&P 500 tracker at various points from 1900 to 2006 and held for 20 years, returns were positive each time in that dataset.
For investors, that matters because it reframes bear-market risk as part of a broader multi-decade pattern rather than a single, binary event. The report positions elevated valuations as a potential setup for more challenging returns ahead, while still arguing that extended holding periods have historically allowed investors to benefit from the market’s tendency to recover and compound.
Bigger picture: what to watch next
With the market at record highs and the valuation debate resurfacing around the CAPE ratio, investors are likely to focus on whether earnings growth can keep pace with the prices investors have already assigned to the broad market. The next test will depend on how corporate guidance evolves and whether macro conditions—such as interest-rate expectations and the path of inflation—support or pressure valuations.
Upcoming catalysts to monitor include further quarterly earnings updates, central bank signals affecting rate expectations, and major economic data releases that influence the discount rate applied to future profits.
