Comparing the Current Rally to 2021 and 1999: What History Suggests for 2026

The scale of the current bull market is staggering. Over the past three years, the S&P 500 has delivered a 78.29% gain, a figure that towers over the index's long-term average of 24.56%. This isn't a one-off spike. The index has now outperformed its long-run average in six of the past seven years, a sustained dominance that is historically rare. When the market punches this far above its weight for three straight years, it triggers a familiar question: what happens next?

History offers only two clear parallels for a three-year run of this magnitude. The last time the S&P 500 posted gains of at least 75% over a three-year stretch was in 2021. Before that, the benchmark's three-year return topped 90% as it closed out 1999. These were not just good years; they were periods of intense market euphoria, bookended by the dot-com bubble and the meme-stock frenzy. The core question for 2026, then, is what happened to the market after those periods. The answer, as we'll see, is rarely a simple continuation of the rally.

Valuation and the CAPE Ratio: A Signal from 2000

The current rally's scale is matched only by its valuation. The S&P 500's three-year return of 78.29% is more than triple the index's long-term average of 24.56%. This surge in price has pushed key valuation metrics to extreme levels. The most telling signal is the cyclically adjusted price-to-earnings (CAPE) ratio, which currently sits at 39.8. That figure is not just high; it is a historical echo. The last time the CAPE ratio reached this height was in 2000, just before the dot-com crash.

This comparison is stark. In the late 1990s, the Nasdaq Composite index rose a staggering 600% as the bubble inflated. When it burst, the index fell 78% from its peak by October 2002. The parallels are structural: both periods saw a technology-driven frenzy, with valuations detached from traditional earnings power. The CAPE ratio, by smoothing earnings over a decade, captures this disconnect. Its current level suggests the market is pricing in a future of sustained high growth, a premium that history shows is fragile.

The implication is not a guaranteed crash, but a shift in the risk-reward setup. As the evidence notes, a soaring CAPE ratio tends to reflect broad market optimism that can be followed by lower returns as prices become increasingly vulnerable. For 2026, the CAPE reading acts as a warning siren. It signals that the market's recent performance has been driven by valuation expansion, not just earnings growth. When the CAPE was last this elevated, the market's path was one of brutal correction. The question for investors is whether the current narrative-powered by AI and corporate profits-can sustain the premium, or if history is about to repeat its lesson.

The AI Driver and Its Historical Pattern

The engine behind this rally is clear: artificial intelligence. Since 2023, the S&P 500 has generated an average annual return of 21%, a figure that is essentially triple the index's long-term average. This AI-driven surge has powered the market's historic three-year climb. Yet, even within this powerful trend, signs of fatigue are emerging.

The 2025 performance, while still positive, was the weakest link. The index posted a 16% gain last year, which was its worst return in the three-year stretch. This deceleration is a classic pattern. Historically, after three straight years of double-digit rallies, the market often sees a cooling in the fourth year. The forward-looking expectation now reflects this reality. Strategists surveyed by Bloomberg expect the S&P 500 to advance 9.2% this year, a figure that is roughly in line with the historical average for the fourth year after such a run.

This sets up a familiar dynamic. The market has been riding a powerful theme, but the pace of that theme's impact is likely to moderate. The AI narrative, while still potent, may be shifting from pure hype to a focus on tangible earnings and capital efficiency. The historical pattern suggests that after a three-year sprint, the market's trajectory often flattens, even if it remains in a bull phase. For 2026, the setup is one of transition, where the extraordinary gains of the past are being replaced by a more pedestrian, but still positive, outlook.

Outcomes After the Last Two Comparable Periods

The outcomes following those two prior three-year rallies were starkly different, yet they shared a critical pattern. In 2021, the market's historic run was followed by a sharp correction. The S&P 500 ended the year down 19% in 2022, a clear retreat after three years of double-digit gains. That was a significant pullback, but it was not the end of the bull market.

The 1999 rally, however, was followed by a crash. The Nasdaq Composite index, which had surged 600% during the dot-com boom, fell 78% from its peak by October 2002. This was a full-blown bear market, wiping out years of gains and marking the definitive end of that cycle.

The common thread is the peak in valuations. In both cases, the market's lofty price levels-reflected in metrics like the CAPE ratio-proved to be a leading indicator. The current CAPE ratio of 39.8 mirrors the level seen in 2000, just before the crash. This suggests a familiar setup: after a multi-year rally, the market's premium pricing often precedes a period of volatility and lower returns. The historical pattern is clear: sustained euphoria tends to be followed by a reckoning.

Catalysts and Risks for 2026

The setup for 2026 is one of transition, where powerful tailwinds meet clear headwinds. The primary catalyst remains the AI-driven earnings expansion. Corporate profits are expected to accelerate in 2026, with earnings growth seen accelerating to nearly 14% from 12% in 2025. This fundamental strength, which has powered the market's rally, provides a tangible floor for valuations. Strategists also point to potential policy tailwinds, with expectations that tax cuts and regulatory easing could add to the boost from the technology buildout.

Yet the dominant risk is the historical pattern of declines following three years of strong gains. The evidence is clear: after such a run, the market often sees a cooling. The average gain expected for the S&P 500 this year is 9.2%, which is roughly in line with the historical average for the fourth year after three straight double-digit rallies. More troubling is the recent history of the pattern itself. The last two stretches of back-to-back-to-back gains of at least 10% were followed by annual declines, in both 2020 and 2015. This suggests a market that is due for a period of volatility and lower returns, not necessarily a crash, but a significant pause.

A mid-term election year introduces a layer of policy uncertainty that history shows can weigh on markets. In such years, the market's average advance is just 3.8% and rises only 55% of the time-a result that is "not much better than a coin toss." This political backdrop, combined with the market's elevated valuation, creates a classic late-cycle environment. As one strategist noted, a three-year stock market like the one just concluded "more often than not occurs in late-cycle market environments leading into cyclical bear markets."

The forward-looking watchlist is straightforward. Investors must monitor two key signals. First, the CAPE ratio of 39.8 remains a critical gauge of whether the market's premium pricing is becoming detached from long-term earnings power. Second, they must track the sustainability of earnings growth. The thesis hinges on corporate profits continuing to drive the market, but as capital spending plans for AI intensify, there is a risk they could start to weigh on profits. If earnings growth falters while valuations remain high, the historical pattern of a correction becomes more likely.