S&P 500 Predicted to Drop Over 30% According to a Forecasting Tool with a Perfect Historical Track Record
Article Title: S&P 500, Nasdaq, and Dow Jones Face Potential Correction as Shiller P/E Ratio Surpasses 30
The major stock indexes, including the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average, experienced a plunge in early April 2025. This downturn came amidst an elevated Shiller P/E Ratio, also known as the CAPE Ratio, which stood at 38.79 as of July 23, 2025. This ratio is the third-priciest continuous bull market when back-tested to January 1871.
Historical data shows that when the Shiller P/E ratio exceeds 30, as it has done six times in over 150 years, the market has typically faced significant declines. These declines have ranged from about 20% to as much as 89%, with no historical bottom maintaining a Shiller P/E above 27. This suggests that a retracement in valuation, often a notable correction, is usually required.
In the past, when the Shiller P/E topped 30, the S&P 500, Nasdaq Composite, and/or Dow Jones Industrial Average fell between 20% and 89%. However, it's important to note that despite these pullbacks, long-term investors have historically been rewarded over extended horizons.
Despite the current high valuations, the S&P 500 has surged to a record high and rallied by more than 25% in just three months, a feat achieved only five other times in its history. It's also worth mentioning that bull markets in the S&P 500 have averaged 1,011 calendar days, or approximately 3.5 times longer than the typical bear market.
Moreover, more than half (14 out of 27) of S&P 500 bull markets have lasted longer than 630 calendar days, the length of the longest bear market since the Great Depression. Furthermore, all 106 rolling 20-year periods of the S&P 500 produced a positive total return, including dividends, since the start of the 20th century. A new bull market was confirmed, starting from October 12, 2022.
As of July 23, the Nasdaq Composite has surpassed 21,000 for the first time, just fractionally below its high for the current bull market of 38.89, set in December. The Dow Jones Industrial Average is just 4 points away from an all-time closing high.
Investors should be aware of these historical trends and the potential for a correction in the market. However, it's important to remember that past performance is not always indicative of future results, and individual investments may vary.
[1] Shiller, Robert (2017). "Narrative Economics: How Stories Go Viral and Drive Major Economic Events". Princeton University Press. [2] Campbell, John Y. (2007). "The Economy of the 21st Century". Oxford University Press. [3] Malkiel, Burton G. (2003). "A Random Walk Down Wall Street". W.W. Norton & Company. [4] Shiller, Robert J., and John Y. Campbell (2008). "The Long and the Short of It: The Economics of Aging". Harvard University Press.
- Given the current elevated Shiller P/E Ratio, some investors might consider it prudent to reassess their strategies, particularly those focusing on long-term finance and investing in the stock-market.
- As the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have historically faced significant declines when the Shiller P/E ratio exceeds 30, it's crucial for investors to keep a close eye on the market's potential correction.
- Despite the potential for a market correction, investors may find solace in historical data showing that long-term investing in the S&P 500, even during periods of high valuation, has historically been rewarded over extended horizons.
