The S&P 500 has surged 115 percent since October 2022, delivering annualized returns of roughly 21 percent over four years—more than double its historical average of 10 percent annually with dividends. The index currently trades at $7,744.
This extended rally has driven the cyclically adjusted price-to-earnings (CAPE) ratio to approximately 41 as of October 2026, far above its historical average of 17.8. The CAPE measures the S&P 500's price against its average inflation-adjusted earnings over the last 10 years.
Such elevated valuations have historically preceded weaker performance through mean reversion, where unusually strong returns reverse into corrections. Before the 1929 crash, the CAPE ratio approached 33. The Dow Jones subsequently lost 89 percent of its value between 1929 and 1932. In 1999, the CAPE surpassed 40 and peaked near 44 before the dot-com collapse, when the S&P 500 declined 49 percent from March 2000 through October 2002 and the Nasdaq Composite plunged 77 percent.
A critical difference separates today's rally from the dot-com era: the underlying revenue and profit generation of AI leaders. In the late 1990s, investors funded speculative technology companies with minimal revenue, no profits, and unproven business models. Today's AI giants have fundamentals. Nvidia, at $217.23, sells the graphics processing units powering the AI infrastructure build-out, with earnings expanding alongside chip demand. Micron Technology benefits from strong demand for high bandwidth memory and advanced DRAM. Alphabet, at $349.22, combines its established advertising business with growing cloud infrastructure and AI services revenue. These companies are generating tangible financial results from AI.
The question for investors is whether these earnings trajectories justify current valuations or whether the market reprices lower despite stronger business fundamentals than the dot-com era offered.
