The rise of artificial intelligence (AI) has ushered in a period of historic gains in the stock market.
The stock market is trading near record highs, and history suggests a reversal could be in the offing.
In the long term, smart investors buy the dip during market downturns.
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Over the past three years, the stock market has been heavily influenced by one key theme: artificial intelligence (AI). The rise of artificial intelligence has generated an unprecedented level of demand, especially in the technology sector. However, adjacent industries, including energy and infrastructure, are also starting to benefit from AI tailwinds.
Against this background, S&P 500 saw a 70% gain over the course of the AI revolution. As the stock market continues to rise, some investors are beginning to become suspicious that we may be headed for a bubble-bursting event.
History suggests that a significant turnaround in stocks could be on the horizon. Let’s research recent market fluctuations and index this data against long-term trends. From there, investors should have a clearer idea of where to invest given the current bullish state of the market.
Image source: Getty Images.
The direction of the S&P 500 has been anything but linear this year. While stocks started 2025 on a high note, things took a sharp turn in early April after President Donald Trump’s “Deliverance Day” tariff announcement.
At the flip of a switch, the S&P 500 fell 15% — pulling the top stocks into an epic reversal.
However, as trade talks took shape and corporate earnings continued to show strength, investor panic began to subside. As of this writing, the S&P 500 is up 16% for the year. If the index were to hold those levels, it would mark the third consecutive year of double-digit gains.
While the term “bubble” is used a lot in financial news programs, there is no specific indicator or singular definition that determines whether the market is in one.
However, the S&P 500 Shiller CAPE ratio is a useful measure to consider. This tool takes into account current stock prices relative to the 10-year average of market earnings (profits). Essentially, the CAPE ratio attempts to smooth out market anomalies, such as periods of economic expansion or recession.
S&P 500 Shiller CAPE Ratio data by YCharts
The S&P 500 Shiller CAPE ratio is currently at 39.4. The last time it even came close to this level was more than two decades ago. In case investors need a reminder, the dot-com bubble burst in early 2000.
Image source: Getty Images.
As the trends show, the stock market went into a prolonged correction after the end of the dot-com euphoria. Moreover, the only other time in history that the CAPE ratio was within striking distance of current levels, aside from the dot-com era, was in the late 1920s — just before the Great Depression.
Given the historical data above, it looks like the S&P 500 is almost certain to be headed for a downward spiral. However, there are some additional details that smart investors should be aware of.
First, the dot-com bubble was rooted in hype-driven narratives about user engagement and clicks. The reality is that many early Internet pioneers had little business traction, limited revenue, and enormous operating losses. These companies should never have experienced skyrocketing valuations to begin with.
AI is fundamentally different. The industry’s largest developers — Nvidia, Alphabet, Amazon, Microsoft, Palantir Technologiesamong others — have already turned AI into several multibillion-dollar businesses through chips, software and cloud infrastructure.
Additionally, sales vary in their duration. In other words, if stocks start to rise, it’s not necessarily an indicator that the economy is about to fall off a cliff like it did in the 1920s.
^ SPX data by YCharts
Despite some bumps along the way, the S&P 500 has proven to be an incredibly resilient investment vehicle over time.
While I can’t say for sure which way the market is headed, I can say with a high degree of confidence that it will continue to move higher for decades to come. I bring this up to drive home a main point: even if stocks sell off next year, history shows that it would be a winning idea to buy the long-term pending decline.
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Adam Spatacco has positions in Alphabet, Amazon, Microsoft, Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia and Palantir Technologies. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.
The stock market issued a warning the likes of which we haven’t seen in more than 20 years. Here’s what history suggests will happen next. was originally published by The Motley Fool
