Can the Bull Market Survive Its Record Run? A Historical Lens

The S&P 500 has just completed a historic three-year streak, posting double-digit gains for the third consecutive year. That feat has only occurred six times since the 1940s, a rare run that underscores the market's extraordinary performance three consecutive years of double-digit gains. This rally has been powered by robust corporate earnings and a persistent bet on artificial intelligence, allowing the market to shrug off significant headwinds. Despite geopolitical tensions and the threat of new tariffs, the index has gained roughly 13% year to date in 2025, demonstrating remarkable resilience.

Yet this strength now sits atop extreme valuations. The market's long-term price-to-earnings ratio, known as the Shiller CAPE, stands at 39.85. This level is historically significant, as the metric is often used to forecast future returns over the next decade. A reading this high has typically been associated with lower average returns ahead, as valuations eventually revert toward their long-term mean.

The setup here is a classic tension between momentum and valuation. The market has defied gravity for years, but its current price levels suggest it is pricing in near-perfect outcomes. The core question for investors is whether this record run can continue, or if the historical pattern of such extreme valuations points to a period of more modest returns and heightened volatility ahead.

Historical Precedents: The AI Boom and the Four Eras of Growth

The current bull market's durability can be tested against two historical patterns: the transformative impact of new technologies and the cyclical nature of sustained growth eras. The AI-driven capital expenditure boom is the most powerful investment cycle in years, but its market impact echoes past tech infusions. This surge in spending on data centers, equipment, and infrastructure is not just a sectoral trend; it is a key driver of the U.S. economy and stock market returns, with sectors like Communication Services and Technology seeing above-market gains AI-related businesses... seeing above-market returns. This pattern of rapid, capital-intensive adoption mirrors the railroad expansion of the 1860s and the dot-com frenzy of the 1990s, each of which followed a path of initial skepticism, market exuberance, and eventual adjustment previous transformative technologies... following similar patterns. The key difference today is that current valuations are supported by earnings growth and business fundamentals, not pure speculation. Yet the scale of investment still presents a portfolio risk that demands careful management.

More broadly, the market's three-year streak of double-digit gains fits a structural pattern seen in four historical eras of sustained growth. Since the Great Depression, the S&P 500 has experienced 12 bull markets, each defined by a 20% gain from its prior low Bull markets occur when stocks gain at least 20% from their most recent low. The current run, now the longest in history, shares the momentum of the 1920s, 1930s, 1950s, and 1990s expansions. Each of those eras ended not because of age, but due to specific catalysts: policy shifts, war-driven economic shocks, or speculative bubbles bursting Roosevelt pulled back on those programs... The Federal Reserve tightened its reserve ratios. The 1940s run was cut short by the inventory recession that followed the end of World War II production Americans eventually cut back on spending... led to a minor economic slowdown. The lesson is that bull markets die from external shocks, not simply from running out of time.

This leads to the valuation context. The current CAPE ratio of 39.8 sits between the peaks of the Tech Bubble in 2000 and the 2020 pandemic rally, suggesting a market priced for a speculative boom rather than steady expansion. While the TTM P/E of 28.5 is also elevated, the P/E10 ratio is the more reliable long-term indicator, and its level here is historically rare The latest P/E10 ratio is 39.8. This places the market in a valuation zone that has typically been associated with lower average returns ahead. The setup is a familiar one: powerful growth drivers fueling a record run, but at prices that leave little room for error. The historical record shows that such periods are vulnerable to the very catalysts-policy missteps, economic shifts, or speculative corrections-that have ended past eras of growth.

The Economic Engine: Growth and Policy Tailwinds

The market's record run is being fueled by a specific mix of policy and investment tailwinds, but the global economic engine is projected to slow. The World Economic Outlook sees global growth decelerating to 2.7% in 2026, a level below the pre-pandemic average and a clear sign of a more subdued expansion. This slowdown is uneven, with domestic demand and policy easing supporting activity in the U.S. and parts of Asia, while Europe and many developing economies face weaker momentum. The key question is whether the U.S. can buck this trend and provide the sustained growth needed to justify current valuations.

For the United States, the forecast points to a modest rebound. Economists project growth to reaccelerate to 2.2% in 2026, driven by a combination of expansionary fiscal policy and expected monetary easing from the Federal Reserve. This tailwind is seen as credible enough to lower the near-term recession probability to 30%. The setup here echoes historical patterns where policy support has helped extend bull markets, but it also introduces a dependency on continued central bank and government action.

The most powerful and specific catalyst is transformative investment. The forecast explicitly names the push to build AI infrastructure as the primary driver of growth for at least another year. This isn't just a sectoral story; it's a capital expenditure boom that is reshaping the economy. The scale of spending on data centers, equipment, and energy grids is a key reason why AI-related businesses have been seeing above-market returns. This mirrors past eras of growth, where massive investments in railroads or information technology fueled economic expansion and market rallies. The difference now is the speed and scale of this cycle, which is directly supporting corporate earnings and market returns.

Yet the historical lens offers a cautionary note. Past growth eras often ended not from a lack of investment, but from the policy missteps that followed. The 1930s bull market faltered when fiscal support was withdrawn too soon, and the 1940s run was cut short by a post-war inventory correction. The current U.S. tailwind is fragile, resting on the expectation of continued Fed easing and fiscal stimulus. If these policies are withdrawn prematurely or if the promised productivity gains from AI fail to materialize as quickly as hoped, the growth engine could sputter. The market's high valuation leaves it vulnerable to any stumble in this fundamental driver.

Catalysts and Watchpoints for 2026

The market's ability to extend its historic run hinges on a few critical near-term developments. The primary tailwind remains the expected shift in monetary policy. Economists project that core inflation will moderate and policy rates to decline in developed markets in 2026. This easing environment is a key driver for the forecasted U.S. growth rebound to 2.2% next year. The market's resilience in 2025 was fueled by optimism over Fed cuts; any deviation from that path-whether due to sticky inflation or a hawkish pivot-would be a direct threat to the valuation support that has sustained the rally.

Equally important is the stability of the global economic and trade backdrop. While the world economy is projected to generate "sturdy" growth in 2026, the outlook is clouded by persistent headwinds. The forecast notes that trade and investment face mounting headwinds, with growth expected to slow as temporary drivers fade. Any significant deterioration in global trade tensions or a new wave of fiscal strains could disrupt the projected growth path and undermine corporate earnings. The market's record run has been built on a narrative of global resilience, but that narrative depends on avoiding a new shock.

Finally, the sustainability of corporate earnings growth is paramount. This is where the AI investment boom becomes the ultimate test. The forecast explicitly names the push to build AI infrastructure as a primary growth driver, which has already translated into above-market returns for sectors like Communication Services and Technology. For the market's elevated valuation to be justified, this spending must continue to flow into tangible productivity gains and profit growth. If the promised returns from this massive capital expenditure fail to materialize as quickly as hoped, it would challenge the fundamental pillar supporting the bull market.

The watchpoints are clear. Monitor the trajectory of core inflation for signs of a durable disinflation, as that will dictate the Fed's pace of easing. Watch for any escalation in trade or fiscal policy uncertainty, which could derail the global growth consensus. And track the performance of AI-related sectors and broader earnings reports to see if the promised productivity dividends are arriving. The market's record run has survived past shocks, but its next test will be in validating its high price with concrete economic results.