The last few years have proven that the stock market is incredibly resilient. Despite no shortage of headwinds — from stubborn inflation to a slew of tariffs to the war in Iran — the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) have all reached record highs after record highs.
If history has anything to say about it, however, this incredible bull run may be reaching a dangerous new threshold.
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Stock valuations are soaring, and while that’s not necessarily a bad thing, it can push the market into bubble territory. Right now, the S&P 500 is repeating a pattern last seen during the dot-com bubble in the early 2000s, and history suggests investors should start preparing for volatility.
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Is the stock market in a bubble right now?
Artificial intelligence (AI) stocks have been lifting the stock market to new heights in recent years, and while that’s led to record-breaking gains for investors, it also raises the risk of overvaluation.
During the dot-com bubble, one of the loudest warning signals was the S&P 500 Shiller cyclically adjusted price-to-earnings (CAPE) ratio. Based on average inflation-adjusted earnings over the last decade, this metric provides a snapshot of the S&P 500’s long-term valuation.
The higher this ratio climbs, the more likely the market is overvalued. It’s averaged around 17 since the 1870s, but in 1999, it skyrocketed into the 40s. It eventually peaked at over 44 in December 1999, around four months before the dot-com bubble officially popped.
Right now, we’re seeing a similar pattern with this ratio. While the climb has been more gradual compared to the sudden spike in 1999, this metric has consistently hovered above 40 since early May 2026.
It’s incredibly rare for this ratio to reach 40 at all, but it’s even more significant for it to stay elevated for months at a time. While past performance can’t predict future market movements, the CAPE ratio suggests we may be at historic valuation levels.
What should investors do right now?
If we are in a bubble, getting out of the market may seem like the most logical thing to do. However, history suggests that staying invested — and being very intentional about where you buy — is the safer move.
Market metrics can help gauge whether stocks are overvalued, but they can’t predict when the next downturn will begin. The CAPE ratio has been inching closer to 40 for much of the past year, and over that period, the S&P 500 has surged by more than 20%.
In other words, if you’d gotten out of the market at the first sign of trouble, you may have missed out on lucrative gains. Because no two bear markets are identical, there’s also a chance that stocks may have many more months of growth still ahead before the next pullback begins.
Even if the bubble bursts tomorrow and the market sinks into a recession, the long-term future is still bright. Analysis from Crestmont Research found that since 1919, the S&P 500 has earned positive total returns over every single 20-year period — no matter how volatile those years were.
Not all stocks will survive a bear market. The dot-com era proved that, as hundreds of tech companies crashed and burned when the bubble popped. But the broader market has proven time and again that it can pull through even severe volatility.
By investing in quality stocks and holding them for at least a decade or two, your portfolio is far more likely to come out the other side of any bear market stronger than ever.
Should you buy stock in S&P 500 Index right now?
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
