The US stock market is near record highs, but one historic valuation warning is flashing again. This warning has appeared only six times in the past 155 years. The warning comes from the CAPE ratio, a valuation measure that compares stock prices with average inflation-adjusted earnings over 10 years.
The current CAPE reading is 41.1, far above its historical average. The CAPE has been tracked back to 1871, giving investors about 155 years of historical data. Its long-term average is around 17.8, meaning today’s reading is more than twice the historical average.
A CAPE reading above 30 for several consecutive months has happened only six times during major bull markets. The current market is the sixth such period, according to the analysis.
Stock market crash warning
That does not automatically mean a stock market crash is coming. But history shows that periods when stocks become this expensive have often been followed by major market declines or sharp corrections.
1929 stock market crash
The first major example came in 1929. Stock prices had climbed sharply during the Roaring Twenties, pushing valuations to very high levels. The 1929 boom eventually ended in a devastating market crash. The crash was followed by a severe bear market that continued into the early 1930s.
Dot-com bubble and Nasdaq crash
The next major warning period came between 1997 and 2001. The CAPE ratio reached an all-time high of around 44 during that period. Technology stocks continued rising even after valuations had become extremely expensive, showing that an expensive market can become even more expensive before it turns. But the dot-com boom eventually collapsed. The Nasdaq fell roughly 77% from its peak to its trough, wiping out huge amounts of market value.
Also read: Did Trump make “hundreds of billions of dollars” for America from stocks? Here’s what he claimed
COVID stock market crash
Then the COVID-19 pandemic changed everything. Within the first two months of 2020, the S&P 500 fell into a brief bear market as economies around the world shut down. The COVID market crash was extremely fast.
Fed rate hikes and stocks
The fifth period came between 2020 and 2022. After the COVID crash, stocks recovered rapidly as central banks provided huge monetary support and interest rates remained extremely low. The market rally eventually ran into a major problem: inflation. Inflation climbed to around 9%, forcing the Federal Reserve to move away from ultra-low interest rates.
The Fed began raising interest rates to fight inflation. Higher rates increased borrowing costs and put pressure on companies whose valuations depended heavily on future growth. The S&P 500 eventually entered a bear market in 2022. High-growth technology stocks were among the biggest losers as investors adjusted to the new higher-rate environment.
Also read: Could oil $12hit 0? Goldman warns as US-Iran attacks threaten Hormuz shipping
AI boom and interest rates
One possible risk is rising interest rates. Some investors are worried that new Federal Reserve Chairman Kevin Warsh could raise rates. Higher interest rates could make the current AI investment boom more expensive. Companies are spending hundreds of billions of dollars on AI infrastructure, including data centers, GPUs, networking equipment, memory and power.
The cost of capital matters because the AI boom depends on huge amounts of spending. If borrowing becomes more expensive, companies could slow down their investments in AI infrastructure. A slowdown in AI spending could hit one of the biggest supports for the current stock market rally. If companies reduce capital spending, investors could start questioning whether today’s high stock valuations are justified.
That could lead to a sharp repricing of stocks. In simple terms, investors could decide that they are no longer willing to pay such high prices for companies if future growth looks weaker.
CAPE ratio explained
But the CAPE ratio is not a crash predictor. A CAPE above 30 does not tell investors that stocks will fall tomorrow, next month or even next year.
The market can stay expensive for a very long time. The dot-com period is a good example: valuations remained extremely high while technology stocks continued climbing before the bubble finally burst. This is why investors should treat CAPE as a warning light, not a stop sign. It tells investors that stocks may be expensive and future returns could be less attractive, but it does not give an exact date for a crash.
The CAPE ratio tries to solve this problem. It uses the average inflation-adjusted earnings of the previous 10 years, instead of relying on just one year’s earnings.
Also read: Is the stock market open on Labor Day? Here’s the 2026 trading schedule
Stock market investment strategy
The current reading near 41 is especially important because it is close to historic extremes. The long-term CAPE average is only about 17.8. Still, an expensive market is not the same as a broken market. The stock market has survived crashes, recessions, wars, inflation shocks and financial crises throughout history.
How to prepare for a market crash
Diversification is another way to reduce risk. Investors can look beyond the technology companies that have driven much of the recent rally and consider defensive parts of the market as well. The biggest lesson from history is not that a crash is guaranteed. Instead, it is that extremely high valuations can leave the market vulnerable when something goes wrong.
The current CAPE reading should therefore make investors cautious, not panicked. The market is historically expensive, but that alone does not prove that an irreversible crash is about to happen. The real question is not simply, “Will the stock market crash?” The more important question for long-term investors is whether their portfolio can survive a major correction if one happens. Trying to predict the exact timing of a crash is extremely difficult.
A better strategy is to build a portfolio that can withstand volatility while remaining invested for the eventual recovery. History is flashing a warning, but it is not predicting the future. The CAPE ratio has crossed the 30 level for the sixth time in 155 years, and previous periods were followed by major market trouble.
