The Last Time the Stock Market Was This Expensive, It Dropped Nearly 50%.

By Johnny Rice – Apr 6, 2026 at 10:00AM ESTKey PointsThe CAPE ratio hit 39.2 in February — a level only seen before the dot-com crash, which saw the index lose 49% over the following two-and-a-half years.At current CAPE levels, Shiller's research implies forward annual returns of just 2%, though the ratio has stayed elevated for long stretches before.While AI is generating real revenue for some companies, spending still dwarfs actual returns so far -- and surging oil prices add another layer of risk.The S&P 500 (^GSPC +0.26%) recorded a cyclically adjusted price-to-earnings (CAPE) ratio of 39.2 in February. If that number doesn't mean much to you, here's the headline: The S&P 500 has only posted a CAPE ratio this high in the lead-up to the dot-com crash of 2000. The S&P 500 lost 49% of its value over the next two-and-a-half years. What is the CAPE? The CAPE ratio is a measure of how expensive the stock market is, comparing what investors are paying relative to what companies actually earn. A normal P/E ratio compares stock prices to a single year of earnings, which is useful, but can be misleading because one good or bad year can skew the picture. The CAPE ratio -- often called the Shiller P/E, after its creator, Yale economist Robert Shiller -- accounts for that by averaging earnings over the previous decade and adjusting for inflation. It helps cut through the noise, giving you a cleaner read on whether the market is cheap, fairly valued, or expensive. Here's the CAPE over the past 30 years: S&P 500 Shiller CAPE Ratio data by YCharts Could this time be different? Now, bulls will argue this time is different; the AI revolution is generating real revenue growth, and the companies dominating headlines are making money hand over fist, unlike the Pets.coms of 1999 and 2000. It's a fair point. But, aside from the fact that belief underpinned pretty much every bubble of the past, here's what the data actually says about forward returns from these levels. Image source: Getty Images. What history says about forward returns at these levels When the CAPE ratio exceeds 30, the implied forward annual return for the S&P 500 is about 4%, according to Shiller's research. At today's levels, the implied return drops to about 2%. Now, the ratio has stayed elevated for long stretches before. Investors who sold in, say, the end of 2023, when the CAPE crossed 30, would have missed out on a return of more than 40% over the last two and a half years. So, does a high CAPE guarantee a crash or poor returns? No, but its statistially more likely, and a high CAPE -- especially as high as we see today -- is how corrections turn into crashes. When valuations are sky-high, stocks have further to fall. Why AI revenue growth may not be enough I think there's ample reason to believe a major downturn could be on the way. While some of the big names today are raking in cash, the reality is that real revenue so far hasn't materialized where it matters most -- the end user. Nvidia is continuing to reap the rewards of big tech's AI capex spree, and while these companies have reported revenue growth and improvements to their bottom line, the spending dwarfs the returns. Adoption at the consumer and enterprise level just isn't substantial enough yet to begin to make up for the hundreds of billions being spent. And now the specter of recession is hanging over the market, driven by surging oil prices from the Iran war. If a recession does materialize, the S&P 500 has historically declined an average of 32% from peak to trough. How to prepare your portfolio But this isn't a reason to panic sell. First of all, I could be wrong -- no indicator is perfect, and the market has a habit of defying predictions. But even if a downturn does materialize, history is clear: Over the last 11 recessions since 1950, the market has recovered from every single one and gone on to set new all-time highs. Often, the most damage comes not from riding out a rough patch but from trying to dodge one. Timing the market is notoriously difficult, and investors who sell during downturns often lock in losses and miss the snapback. Some of the market's strongest days tend to arrive right on the heels of its worst, and missing just a handful of those days can put a serious dent in your long-term returns. That said, this is a good moment to stress-test your portfolio. If you're heavily loaded up on high-valuation growth names trading on future promises rather than present earnings, it might be worth rebalancing toward companies with fortress balance sheets, real profitability, and durable competitive advantages.Read NextApr 6, 2026 •By Bram BerkowitzBillionaire Warren Buffett Just Said 5 Words That Confirmed Wall Street's Deepest FearsApr 6, 2026 •By Adria CiminoWalmart Stock is Sounding a Warning Bell for Investors, and It's Ringing Out at Its Loudest Since the 2008 Financial Crisis. History Paints a Clear Picture of What Happens Next.Apr 6, 2026 •By Sean WilliamsThe Federal Reserve's March and April Inflation Forecast Is In -- and Things Just Keep Getting Uglier for Wall StreetApr 6, 2026 •By Trevor JennewineWill the Stock Market Crash as the Oil Shock Hits the Economy? History Says the S&P 500 Will Do This Next.Apr 5, 2026 •By Marc GubertiTariff Uncertainty Is Back: Why Selling Into the Fear Has Rarely Paid OffApr 5, 2026 •By David DierkingWill the S&P 500 Crash in 2026? History Offers a Clear AnswerAbout the AuthorJohnny Rice is a contributing writer for The Motley Fool covering tech stocks. He previously contributed to various financial publications.TMFJohnnyRiceStocks MentionedS&P 500 IndexSNPINDEX: ^GSPC$6,600.03(+0.26%)+$17.34*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.