We’ve just seen an extremely rare S&P 500 event that’s happened 5 times in 55 years — and history is pretty clear on what’s next

• Despite a small decline in early April, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite recently hit new record highs.

• The Federal Reserve cut interest rates in late October, a rare cut after the Wall Street index hit an all-time high.

• Stocks remain historically expensive, but there is no way to effectively gauge when corrections will occur.

• 10 Stocks We Like More Than the S&P 500 ›

in 2025 Wall Street’s major stock indexes were relatively successful. Benchmark at the beginning of April S&P 500 (SNPINDEX: ^GSPC)iconic Dow Jones Industrial Average (DJINDICES: ^DJI)and growth stocks dominate Nasdaq Composite (NASDAQINDEX: ^IXIC) survived a short-term crash that put the former two firmly in correction territory and the latter into the first bear market since 2022.

But it’s been all systems go for the stock market for the past seven months. The S&P 500 posted one of its strongest three-month returns since the start of April, with all three indexes recently hitting record highs. In fact, Wall Street’s gains were so pronounced that the bubble began to pop.

When stock markets become more volatile, or when stocks seem to be taking off, investors often look to correlating past events to predict where stocks might go in the future. Although these correlations cannot specifically predict what will happen in the future, some of them have phenomenal results that predict the future.

A little over a week ago, we saw one of these highly correlated events with the broad S&P 500 — and the story couldn’t be clearer about what’s next for stocks.

With the federal government in motion, there hasn’t been much economic data available to investors. This meant that on October 28-29 the upcoming Federal Open Market Committee (FOMC) meeting.

The FOMC consists of 12 members of the Federal Reserve and is responsible for managing the nation’s monetary policy. This is done by adjusting the federal funds rate, which affects the interest rates associated with lending and can indirectly affect mortgage rates. A country’s central bank can also use open market operations, such as buying or selling long-term US Treasuries, to affect long-term bond yields (bond prices and yields are inversely related).

All eyes were on the FOMC on October 29th. announcement that cut the federal funds rate by 25 basis points to a new range of 3.75-4 percent. Lowering this interest rate makes it cheaper for banks to lend to each other overnight.

What made this FOMC decision so interesting and rare was that it was only the fifth time since 1970 that interest rates were cut when the S&P 500 was at an all-time high. It was confirmed by JP Morgan Private Bank (the company’s private banking and wealth management arm), with data support from Bloomberg Finance.

JP Morgan notes that the S&P 500 averaged 20% higher one year after the four previous rate cuts to all-time highs, with the worst return being a 15% gain. The lowest return of the four previous events occurred last year, when the country’s central bank began a rate-cutting cycle.

There is logic that stocks should continue to rise as the FOMC cuts interest rates. Each rate cut makes borrowing cheaper, which in turn can encourage companies to hire, make acquisitions, and invest aggressively in innovation. This is usually a recipe for economic growth.

As the S&P 500, Dow Jones Industrial Average and Nasdaq Composite are driven by the artificial intelligence (AI) revolution, lower lending rates could boost existing corporate growth rates and maintain historically high valuation premiums. That was the perfect recipe for the stock market last year, and based on history, it may continue to be next.

But while this historical correlation is impeccable at predicting future upside over the next 12 months for the S&P 500, another tool with an equally pristine forecasting record paints a different picture.

While historical data clearly shows the S&P 500 rallied sharply after the Federal Reserve cut interest rates, trading at record highs, one time-honored valuation tool acted as a harbinger of impending disaster for the benchmark.

When the word “value” comes up, most investors probably think of the traditional price-to-earnings (P/E) ratio. The P/E ratio, which is obtained by dividing a company’s stock price by its trailing 12-month earnings per share (EPS), is an excellent tool for quickly determining the size of mature companies during long periods of economic expansion.

The problem with the P/E ratio is that it becomes pretty useless in a recession if EPS goes negative, and it doesn’t take into account the growth rates of companies. While all valuation tools have their flaws, the one that most closely resembles an apples-to-apples comparison and predicts the future flawlessly is the S&P 500 Shiller P/E ratio. Note: The Shiller P/E is also called the cyclically adjusted P/E ratio or the CAPE ratio.

Instead of being based on trailing 12-month EPS like a traditional P/E ratio, the Shiller P/E represents the average inflation-adjusted EPS over a 10-year period.

Back check to 1871. In January, Shiller’s P/E average was 17.31 times. It peaked at 41.20 in late October during the current bull market. This is the second highest CAPE ratio during an uninterrupted bull market in 154 years, and the sixth time the multiple has been consistently above 30.

After five previous events where the Shiller P/E exceeded 30, the S&P 500, Dow Jones Industrial Average, and/or Nasdaq Composite fell between 20% and 89% of their respective values. Based on historical correlation alone, a high multiple of 41.20 would place the benchmark in at least a future bear market.

But here’s a caveat to this historical correlation: The Shiller P/E is not a timing tool.

While a long-term number above 30 has been a harbinger of doom, based on past checks, there is no blueprint for how long the stock can remain expensive.

While we know they don’t trade at high prices for long periods of time, stocks stayed high for three years before the dot-com bubble burst. This suggests that both of these historically flawless predictors—an all-time rate cut and a Shiller P/E above 30—could co-exist with the stock market continuing to rally higher on the outlook, with the Shiller P/E indicating a sharp decline in the likelihood in the coming years.

Before buying stocks in the S&P 500, consider the following:

The Motley Fool Stock Advisor a team of analysts has just identified what they think is Top 10 promotions for investors to buy now… and the S&P 500 was not one of them. The 10 stocks that made the cut could yield huge returns in the coming years.

Consider when Netflix you made this list in 2004 December 17th… if you invested $1,000 during our referral, you would have $591,613!* Or when Nvidia you made this list in 2005 April 15th… if you invested $1,000 at the time of our referral, you would have $1,152,905!*

Now it’s worth mentioning Stock advisor the total average return is 1,034%, a market-crushing advantage over the S&P 500’s 191%. Don’t miss the latest top 10 list you can find Stock advisorand join an investment community built by individual investors for individual investors.

View 10 promotions »

*Stock Advisor returns from 2025. November 3

JPMorgan Chase is an advertising partner of Motley Fool Money. Sean Williams has no positions in any of the stocks mentioned. The Motley Fool owns and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

We just witnessed an extremely rare S&P 500 event that’s happened 5 times in 55 years — and history is pretty clear on what’s next, originally reported by The Motley Fool