S&P 500 just hit a level seen only once before in 155 years — could a market crash be next?

The S&P 500 CAPE ratio hit 40 for only the second time in 155 years, raising concerns about valuations, future returns and a possible market correction.

Updated on: Aug 23, 2026, 19:31:06 IST

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The S&P 500 has reached a very rare valuation level. The S&P 500 Shiller CAPE ratio hit 40 in June 2026, marking only the second time in 155 years that the measure has reached this level.

The CAPE ratio is a long-term way to judge stock valuations. Yale economics professor Robert Shiller developed the cyclically adjusted price-to-earnings, or CAPE, ratio. Instead of looking at only the past four quarters of earnings, it uses a 10-year average of inflation-adjusted earnings.

S&P 500 CAPE history

Shiller's data goes all the way back to 1871. That gives investors more than 150 years of history to compare today's market valuation with previous periods. The CAPE ratio has usually stayed much lower. From 1871 through 2000, the S&P 500 Shiller CAPE ratio averaged about 15.7, according to The Motley Fool.

A CAPE ratio above 40 has been extremely rare. The measure did not cross 30 until 1929. It then stayed below 30 for almost 70 years before reaching new highs during the late-1990s stock market boom. The first time CAPE crossed 40 was during the dot-com boom. In early 1999, the ratio moved above 40 for the first time. Later that year, it climbed above 41 and stayed around those levels until October 2000.

Dot-com bubble warning

That period ended badly for investors. The dot-com bubble eventually burst, and the S&P 500 fell more than 45% from its peak, according to The Motley Fool. The index took nearly seven years to fully recover. Now, the same warning level has appeared again.

More than two decades after the dot-com era, the CAPE ratio finally moved back to 40 in June 2026. This makes the current market valuation only the second such episode since 1871.

Stock market crash risk

History suggests that very high valuations can be a warning sign. The CAPE ratio also climbed above 30 shortly before the 1929 stock market crash, which was followed by the Great Depression, according to The Motley Fool.

The concern is not just that stocks are expensive today. The bigger issue is what has historically happened after valuations became extremely stretched. Investment manager Invesco studied past market returns and found that the S&P 500 has produced negative annualized returns over the following decade when the CAPE ratio reached very high levels.

Market valuation could fall

The CAPE ratio tends to move back toward its long-term average. There are basically two ways this can happen: stock valuations can fall, or company earnings can grow enough to make current prices look more reasonable.

A fall in valuations can happen much faster than a big jump in earnings. That is why a very high CAPE ratio can create a risk for investors if stock prices fall before earnings have enough time to catch up.

Today's market is different

But today's market is not exactly the same as the dot-com bubble. The Motley Fool points out that S&P 500 earnings are currently rising faster than valuations. During the dot-com boom, many companies had extremely high stock prices despite losing large amounts of money.

Today's high market valuation does not automatically mean another dot-com-style crash is coming. Stronger earnings could help bring valuations down over time without requiring a major market collapse.

What investors should do

Still, investors should not ignore the 40 CAPE level. The historical record suggests that periods of extremely high valuations can be followed by weaker stock market returns. The message for investors is not to panic or sell everything. Instead, investors should be more selective about where they put their money, focusing on high-quality companies with strong long-term growth prospects.

Investors may want to look for companies whose stock prices are reasonable compared with how quickly their businesses are expected to grow. Having cash available gives investors the ability to buy stocks at cheaper prices if a major market sell-off happens.

Warren Buffett is following a similar strategy. The Motley Fool notes that Buffett has also been building up cash, suggesting that he is being cautious about current market valuations. 40 is a warning, not a prediction. The S&P 500 Shiller CAPE ratio reaching 40 is only the second time in 155 years that it has happened.

History shows that such extreme valuations can be followed by painful periods for investors, but today's stronger earnings mean the current situation may not play out exactly like 1929 or 2000.

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