Stock Valuations Reach 155-Year Extremes as Markets Eye 2026 -- What History Teaches Us About Future Returns

The Numbers Tell a Sobering Story

The U.S. equity markets have charged ahead with remarkable momentum. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have repeatedly broken through previous ceilings, driven by artificial intelligence enthusiasm, anticipated Federal Reserve rate reductions, and earnings that have exceeded expectations. Yet beneath this celebratory surface lies an uncomfortable truth: the overall market has become exceptionally expensive by historical standards.

Using the Shiller P/E Ratio (also known as the CAPE Ratio) as a measuring stick, we can peer backward 155 years to January 1871. This inflation-adjusted valuation metric, which smooths earnings over a decade-long period, tells a particularly revealing story. Since 1871, valuations have only climbed higher than today’s levels on a single prior occasion.

When Valuations Breach Historical Thresholds

The distinction between traditional P/E multiples and the Shiller P/E lies in durability. While conventional earnings ratios can swing wildly during economic shocks, the Shiller methodology provides a clearer picture across economic cycles. The 155-year average sits at 17.31x, yet the S&P 500’s current Shiller P/E has reached approximately 40.20 – positioning us at the second-most expensive point on record.

This represents only the third instance since 1871 when this metric crested above 40. The prior occurrences proved instructive: December 1999 witnessed a peak of 44.19 before the technology bubble deflated, and just before the 2022 downturn materialized, valuations briefly exceeded 40. On six occasions across our 155-year window, the Shiller P/E has surpassed 30 during bull market phases.

The historical script following these previous five extremes reads remarkably consistently. Each time valuations reached these rarefied levels, the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average subsequently experienced declines ranging from 20% to 89%. The Nasdaq dropped 78% after the dot-com collapse, while the S&P 500 fell 49%. These weren’t temporary stumbles – they represented fundamental repricing events.

Understanding Market Cycles and Their Timing

A critical caveat deserves emphasis: no single indicator can forecast short-term market movements with certainty. Yet patterns do emerge across extended historical periods, and valuation extremes have shown an exceptional ability to foreshadow what follows.

The question isn’t whether a correction will arrive, but when. Over the past 16 years (setting aside the five-week COVID-19 collapse and the nine-month 2022 bear market), equity investors have enjoyed sustained advances. This extended tranquility has lulled many into believing that stock market downturns belong to previous generations.

However, the data surrounding downturn durations provides perspective. Research examining every bear market between the Great Depression and mid-2023 revealed that the average decline resolved in approximately 286 calendar days – roughly 9.5 months. No documented bear market endured beyond 630 calendar days. By contrast, the typical bull market persists for around 1,011 days, or 3.5 times longer than the average bear market. Approximately half of all bull markets exceeded the length of the longest bear market on record.

Where Opportunity Meets Crisis

Here lies the paradox that separates patient investors from emotional traders. When panic grips markets and prices plummet 20% or more in sharp, rapid declines (what some call “elevator-down” moves), most investors recoil. Yet these moments have historically provided the most compelling entry points for disciplined capital deployment.

Stock market corrections, bear markets, and even crash events represent normal components of investing cycles – not aberrations. The Federal Reserve and government interventions cannot prevent these events indefinitely. They are inevitable features of market functioning.

This understanding transforms perspective. Rather than viewing declines as catastrophic, long-term investors can recognize them as periodic opportunities to acquire ownership stakes at substantial discounts. History demonstrates that investors who deployed capital during significant stock market weakness, then maintained their positions through recovery cycles, captured generational wealth-building returns.

Preparing for the Unknown

The challenge remains: timing. Nobody possesses advance knowledge of when a downturn begins, how many months it persists, or precisely where prices stabilize. This uncertainty leads many to maintain fully invested positions despite valuation concerns – which itself represents a rational strategy given the superior average returns delivered by bull markets over bear markets.

The resolution likely hinges on individual circumstances. Investors approaching retirement may prefer reducing exposure at current valuations. Those with multi-decade horizons might view future weakness as an advantage. Either way, the question of whether the stock market will go back up ultimately depends on timeframe. Over decades, markets have consistently recovered from every prior extreme. Whether that recovery occurs in months or years remains unknowable.

What remains clear: valuations at 155-year extremes carry implications. History provides the framework; individual action determines outcomes.