The S&P 500 recently completed three years of excellence. The famous benchmark posted double-digit gains in each of those years as the bull market continued, hitting record after record. Investors focused on artificial intelligence (AI) stocks, quantum computing players and other growth names benefiting from generally positive market environments. These stocks have delivered big gains and many could be on the way up in the long term as well.
It’s important to remember that the AI and quantum computing stories are in the early stages of development — so much more growth may develop in the coming years. But in recent weeks, overall stock market momentum has slowed.
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The S&P 500 started this year amid a variety of factors weighing on investors’ minds — from worries about the pace of interest rate cuts to concerns that AI companies may not meet growth expectations. Strong earnings reports from technology companies such as Meta platforms and Taiwan Semiconductor Manufacturing have brought some relief to the market, but investors aren’t as quick to jump into tech stocks as they were a few months ago.
In this context, it is essential to take into account a rather rare movement of the capital market. The S&P 500 is doing something it’s seen only twice in the last 154 years — and history is clear about what’s coming.
Image source: Getty Images.
So first, a little more detail on some of the concerns that have affected market dynamics so far this year. The Fed began a series of interest rate cuts in 2024 that continued last year, but kept rates steady in a decision last month. Markets don’t like uncertainty, so interest rate policy hasn’t been a positive catalyst for stocks lately.
Meanwhile, while tech companies reported big gains and talked about strong demand from AI clients, that message wasn’t enough to really push the index higher in a major way. In fact, comments about ongoing big AI spending from tech giants such as Alphabet and Amazon worried investors, and that pushed these stocks and others lower. As a result, the S&P 500 is little changed so far this year.
This brings me to the movement we haven’t seen often from the index and it has to do with valuation. The S&P 500 Shiller CAPE ratio, an inflation-adjusted look at a stock’s price relative to earnings per share, reached beyond the 39 level — something it had done only once before, and that was just before the dot-com bubble burst.
S&P 500 Shiller CAPE Ratio data by YCharts
If we zoom in for a closer look, using the last decade as an example, we can see what history shows us: the index, after reaching a valuation peak, continued to decline.
S&P 500 Shiller CAPE Ratio data by YCharts
A look at the past month, with the valuation starting to drop slightly from the peak, shows us that this move could be starting.
S&P 500 Shiller CAPE Ratio data by YCharts
Does this mean we should prepare for a big decline in 2026? Not necessarily. Although history shows us that high valuations have always led to a decline, this decline is not always long-lasting. It’s possible that the index will go down a bit, valuations will go down, and then the index will recover and end the year higher.
Meanwhile, whether the S&P 500’s declines are short-lived or result in a negative performance this year, investors should keep this crucial point in mind: The S&P 500 has consistently bounced back from tough times — even the worst market crashes — and continued to gain. This is great news because it means that even if you go through one of these rough times — as you likely will when investing over a period of years — it’s temporary.
If you buy quality stocks and hold them for the long term, it’s okay if the market dips here and there — even in 2026 — because you’re well positioned to get a win over time.
Before buying stocks in the S&P 500 index, consider the following:
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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The stock market is doing something it’s only seen twice in 154 years — and history is clear about what’s to come. was originally published by The Motley Fool
