The Stock Market Is Repeating a Pattern Not Seen Since the Dot-Com Bubble. History Says Investors Should Make This 1 Move Right Now.
Key Points
Valuations are soaring, and history may be repeating itself in some ways.
Now more than ever, it's important to choose your investments wisely.
A bear market is coming eventually, and healthy stocks are the most likely to thrive over time.
It's been a record-breaking few years for the stock market. Since the current bull market began in October 2022, the S&P 500 (SNPINDEX: ^GSPC), Dow Jones Industrial Average (DJINDICES: ^DJI), and Nasdaq Composite (NASDAQINDEX: ^IXIC) are up by 127%, 95%, and 161%, respectively.
Much of this growth has been fueled by the artificial intelligence (AI) boom, as tech companies spend hundreds of billions of dollars building out AI-related data centers. But all that spending is starting to worry investors, many of whom are drawing comparisons to the dot-com bubble two decades ago.
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The data is showing a worrying pattern, too, as major stock market indicators are flashing warning signals not seen in years. Here's what history says investors should do right now to prepare.
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Market valuations may be in bubble territory
In the late 1990s, internet companies saw unprecedented growth. The S&P 500 climbed by close to 200% between 1995 and 1999 alone, with countless record-breaking IPOs throughout the decade.
The S&P 500 Shiller cyclically adjusted price-to-earnings (CAPE) ratio is a valuation metric that was among the first to flash a warning sign that the market was in a bubble. This metric tracks the S&P 500's 10-year inflation-adjusted earnings, and the higher it climbs, the more likely the index is overvalued.
Dating back to 1871, the CAPE ratio has averaged around 17. It experienced a sudden spike during the dot-com boom, surpassing 40 for the first time in history in January 1999. Just over a year later, in March 2000, the bubble officially popped, and the S&P 500 fell into a bear market that would last over two years.
S&P 500 Shiller CAPE Ratio data by YCharts
More recently, the CAPE ratio is surging yet again. While it hasn't quite reached the peak of the dot-com bubble, it's consistently remained above 40 since May 2026 -- which is only the second time in history it's stayed this high for months.
The CAPE ratio isn't the only market metric sounding the alarm, either. In 2001, Warren Buffett popularized a metric now nicknamed the Buffett indicator. This metric also measures broad market valuations by comparing the total value of U.S. stocks to GDP.
Like the CAPE ratio, a higher figure suggests the broader market may be overvalued, and Buffett has famously warned that when it nears 200%, investors are "playing with fire." As of this writing, it's at just over 237%.
The one move history says protects investors every time
It's impossible to say how the market will perform in the coming months. No two bear markets are identical, so although valuations are historically high right now, it doesn't necessarily mean that we're headed toward a dot-com-style meltdown.
That said, if there's one key lesson from the dot-com bubble, it's that fundamentals beat hype every single time. Many tech stocks soared in price in the 1990s despite having unsustainable business models or poorly managed finances. When the bubble popped, these were the companies that couldn't survive the subsequent recession.
If we are in a bubble again, something similar could happen. Popular stocks aren't always the healthiest investments, especially if their surging prices are driven primarily by hype and speculation.
The most lucrative long-term investments are those with solid foundations -- such as a durable competitive advantage, reliable revenue streams, and a leadership team with a track record of smart decision-making. These stocks will still experience short-term volatility, but strong fundamentals will help them weather economic rough patches.
The investments you choose today will affect your portfolio for years or even decades. By focusing on substance over hype, you can ensure you're set up for long-term success.
Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.