The Stock Market Is Doing Something Witnessed Just Once Ever Before -- and History Has a Clear Answer on What Happens Next

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S&P 500 Index ›Despite several ups and downs, the last five years have been nothing short of spectacular for stock investors. Since midyear 2020, the S&P 500 (SNPINDEX: ^GSPC) has produced a compound average total return of 17% per year, well above its historic average. The tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) has performed nearly as well, with a 16.5% average return.Those returns come in spite of two massive declines of 19% or more in the S&P 500 and 23% or more in the Nasdaq, in 2022 and 2025. Today, both stock indices trade at new all-time highs.But one stock-market indicator suggests the indices could be in store for another substantial decline in price in the not-too-distant future. It just reached a level seen only once before in history, and it has a flawless track record of predicting significant downside in stock prices.Image source: Getty Images.The sticker price of a stock doesn't tell you very much about whether or not it's a good value. In order to judge whether a stock is expensive, most investors will look at its price-to-earnings (P/E) ratio. The P/E takes the share price and divides it by the earnings per share for the company. All things being equal, investors prefer to buy stocks when their P/E ratios are low.But earnings for companies generally don't grow in a straight line. Recessions, inflation, and all sorts of other economic pressures can impact earnings per share. And usually they affect the entire stock market, not just individual companies. That's why economist Robert Shiller developed the cyclically adjusted price-to-earnings (CAPE) ratio.The CAPE ratio takes into account the last ten years of earnings and adjusts each year for inflation. The standard P/E ratio only looks at one year of earnings. Looking at a much longer period evens out the impact of economic shocks like recessions.As of this writing, the S&P 500's CAPE ratio has climbed to 38.8. That's above the month-end peak from 2001, and the highest level we've ever seen outside of the dot-com bubble, when the ratio climbed above 40.To give that valuation some more context, the S&P 500 (along with its earlier equivalents) has traded at an average CAPE ratio of 17.6 based on data going back to 1871. That multiple has climbed considerably in the modern era, though. Still, the average CAPE ratio for the index since the start of the century (which includes the peak of the dot-com bubble) is 27.6. The current valuation is 40% higher than that.Terms and Privacy PolicyPrivacy & Cookie SettingsMore InfoS&P 5006,342.37 -28.49 (-0.45%)Dow 3044,310.07 -322.92 (-0.72%)Nasdaq21,065.32 -32.97 (-0.16%)Russell 20002,227.41 -15.55 (-0.69%)VIX16.64 +0.66 (+4.14%)Gold3,325.90 -55.30 (-1.64%)PortfolioSign in to access your portfolioSign inTop gainersPIII P3 Health Partners Inc. 7.42 +1.62 (+27.98%)FTAI FTAI Aviation Ltd. 144.67 +30.53 (+26.75%)WING Wingstop Inc. 364.78 +74.48 (+25.66%)GNRC Generac Holdings Inc. 181.37 +30.05 (+19.86%)TER Teradyne, Inc. 108.22 +17.67 (+19.52%)Top losersNEGG Newegg Commerce, Inc. 43.93 -12.26 (-21.82%)CAR Avis Budget Group, Inc. 170.37 -33.51 (-16.44%)SLGN Silgan Holdings Inc. 46.57 -9.23 (-16.54%)CHKP Check Point Software Technologies Ltd. 186.07 -32.26 (-14.78%)ENTG Entegris, Inc. 80.54 -12.21 (-13.16%)Most activeSOFI SoFi Technologies, Inc. 21.74 -0.66 (-2.95%)NVDA NVIDIA Corporation 178.97 +3.46 (+1.97%)LCID Lucid Group, Inc. 2.4950 -0.0650 (-2.54%)TSLA Tesla, Inc. 316.35 -4.85 (-1.51%)AAL American Airlines Group Inc. 11.43 +0.01 (+0.04%)Earnings eventsTrending tickersWING Wingstop Inc. 364.25 +73.95 (+25.47%)NVDA NVIDIA Corporation 178.91 +3.40 (+1.94%)FCX Freeport-McMoRan Inc. 38.75 -4.49 (-10.37%)MRVL Marvell Technology, Inc. 81.51 +5.17 (+6.77%)PTON Peloton Interactive, Inc. 7.26 +1.08 (+17.39%)Top economic events