Since October 2022, the bulls have been in charge on Wall Street. In 2024, the ageless Dow Jones Industrial Average (^DJI 0.25%), benchmark S&P 500 (^GSPC 0.16%), and growth-propelled Nasdaq Composite (^IXIC -0.06%) all climbed to numerous record-closing highs and finished the year up by 13%, 23% and 29%, respectively.

Investors can thank the artificial intelligence (AI) revolution, strong corporate earnings, and excitement surrounding stock splits, as part of a laundry list of factors responsible for lighting a fire under equities.

Although stocks moving higher is nothing new on Wall Street, the magnitude by which the broad-based S&P 500 has been rising in recent years is in rarified territory -- and its historic significance can’t be overlooked.

A professional trader using a stylus to interact with a rapidly rising stock chart displayed on a tablet screen.

Image source: Getty Images.

The S&P 500 makes history -- and potentially foreshadows trouble

The aforementioned laundry list of catalysts helped to lift the S&P 500 to a gain of 24% in 2023 and 23% in 2024. These are out of the norm increases for a stock index that’s historically risen by closer to 8% per year since 1928.

But what really stands out is how rare back-to-back gains of 20% or greater have been for the S&P 500. Over the last 96 years, there are only four periods of consecutive annual gains topping 20%: 

  • 1935 (41.37%) and 1936 (27.92%)
  • 1954 (45.02%) and 1955 (26.4%)
  • 1995 (34.11%), 1996 (20.26%), 1997 (31.01%), and 1998 (26.67%)
  • 2023 (24.23%) and 2024 (23.31%)

As you’ll note, gains of this magnitude in back-to-back years haven’t occurred in a quarter of a century, and they typically happen about once every generation.

What’s of particular interest is how the stock market has responded in the years subsequent to these outsized returns.

  • Following the two-year gains in 1935-1936, the S&P 500 plunged by 38.59% in 1937.
  • Following 1954-1955, gains slowed to 2.62% in 1956 before a decline of 14.31% for the S&P 500 in 1957.
  • The dot-com bubble was a unique period that saw 1999 (a gain of 19.53%) just miss out on extending this historic streak of gains to five years. But in 2000, 2001, and 2002, the S&P 500 respectively dropped by 10.14%, 13.04%, and 23.37%.

While there’s not a perfect correlation here, it is worth pointing out that five of the S&P 500’s 16 years of double-digit percentage declines since the Great Depression ended have occurred immediately or shortly after successive 20%-plus gains. This would appear to foreshadow trouble for stocks.

A historically pricey stock market may be Wall Street’s undoing in 2025

Though there are a couple of highly correlative data points and forecasting tools that have previously been harbingers of downside for the Dow Jones, S&P 500, and Nasdaq Composite, such as the first meaningful year-over-year decline in M2 money supply since the Great Depression, the S&P 500’s Shiller price-to-earnings (P/E) Ratio stands out as perhaps Wall Street’s biggest concern in the new year.

The Shiller P/E Ratio, which is also known as the cyclically-adjusted P/E ratio (CAPE Ratio), is based on average inflation-adjusted earnings from the previous 10 years. The advantage of looking at 10 years of inflation-adjusted earnings history is that it smooths out the impact that unforeseen shock events might have on earnings per share.

S&P 500 Shiller CAPE Ratio Chart

S&P 500 Shiller CAPE Ratio data by YCharts.

The S&P 500’s Shiller P/E has been back-tested 154 years to January 1871 and its average reading over that time is 17.19. 

Yet as you can see in the chart above, the Shiller P/E has spent much of the last 30 years above its long-term average. This is a reflection of the internet democratizing access to information and online trading, as well as interest rates declining to historically low levels, which spurred risk-taking by investors.

But as of the closing bell on Jan. 8, the S&P 500’s Shiller P/E was 37.58. This is ever-so-slightly below its December 2024 high of nearly 39, and it represents the third-highest reading during a continuous bull market in 154 years.

What’s concerning is how stocks have fared anytime the Shiller P/E has surpassed 30. Although the Shiller P/E isn’t a timing tool and doesn’t offer any insight as to when valuations will peak, the previous five instances where it topped 30 during a bull market rally were eventually followed by declines of 20% to 89% in the Dow Jones, S&P 500, and/or Nasdaq Composite.

Premium valuations have historically been a red flag for investors, and we’re currently witnessing only the sixth instance since 1871 of the Shiller P/E topping 30.

A businessperson holding a tablet in their left hand while reading a financial newspaper in their right hand.

Image source: Getty Images.

Keep things in perspective

While you’ve seen that history can portend trouble for Wall Street, it’s just as important to take a step back and understand that time and history can also be the biggest allies of investors.

On one end of the spectrum are stock market corrections and bear markets. Although these events can, at times, be scary and tug on investors’ heartstrings, downturns in the broader market tend to be short-lived. In comparison, a wide-lens view of the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite depict indexes that rise with consistency over long periods.

But you don’t have to just take my word for it. The researchers at Bespoke Investment Group published a data set on social medial platform X in June 2023 comparing the calendar-day length of bear and bull markets in the S&P 500 dating back to the start of the Great Depression in 1929.

As you’ll note from this data set, the average bear market decline in the S&P 500 lasted for only 286 calendar days, or roughly 9.5 months. Meanwhile, the average of 27 S&P 500 bull markets (as of June 8, 2023) stuck around for 1,011 calendar days, which works out to about two years and nine months.

Furthermore, over half of all S&P 500 bull markets (including the current bull market when extrapolated to present day) have lasted longer than the lengthiest bear market.

Regardless of what may be foreshadowed in the short-term, the stock market has a flawless track record of eventually achieving new highs over the long run.