We Are Witnessing the Stock Market Do Something for Only the 3rd Time in 156 Years, and History Is Clear About What Comes Next
Key PointsStocks have soared over the last few years as optimism around AI helps overshadow the many problems in the economy.
The stock market is currently experiencing a rare event, one that has only transpired three times in the past 156 years, according to historical data. Following a minor decline in 2022, the S&P 500 has experienced an impressive average annual return of around 21% over the past decade, more than double its long-term average of roughly 10%.
However, history suggests that such substantial gains often lead to significant drawdowns as the market eventually reverts to its historical norm. To better understand the potential future of this bull market, it's essential to examine some of the challenges currently facing it. One key metric that investors often analyze is the cyclically adjusted price-to-earnings (CAPE) ratio.
This ratio compares the price of the S&P 500 with its average inflation-adjusted earnings over the past ten years. By utilizing a ten-year timeframe, the CAPE ratio helps smooth out short-term fluctuations, offering a more accurate picture of the market's value relative to historical standards.
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