The Stock Market Just Did Something for the First Time Ever. History Says Investors Should Be Worried. But Could This Time Be Different?

Long-time investors may think they've seen it all. However, they witnessed something just a couple of weeks ago that had never happened before in U.S. stock market history. The S&P 500 (SNPINDEX:^GSPC) topped 7,750 for the first time. The widely followed index even briefly flirted with reaching the 7,800 mark. Although the S&P 500 has retreated slightly since then, it's still only about 2% below its all-time high.

Achieving this milestone is exciting. However, it could also be scary for many investors. Soaring valuations have accompanied the stock market's surge. History shows that investors should be worried when valuations become as frothy as they are now. But five words could be true that usually aren't: This time could be different.

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Investors have become accustomed to the S&P 500 setting record highs in recent years. The index has skyrocketed more than 130% since the beginning of 2020. The stock market's sizzling performance is a reason for celebration. However, it's also a reason for caution.

While the S&P 500 has risen sharply, so has the benchmark valuation metric for the index: the S&P 500 Shiller CAPE ratio. CAPE stands for cyclically adjusted price-to-earnings ratio. Nobel laureate and economist Robert Shiller created the metric to measure the S&P 500's valuation by smoothing earnings multiples using a 10-year moving average and adjusting earnings for inflation.

The S&P 500 Shiller CAPE ratio has been higher than it is now only once before -- in late 1999 and early 2000. Soon after reaching that high, the stock market tanked as the dot-com bubble burst. Some believe the market is in an AI bubble now.

Another issue is how rapidly the CAPE ratio has risen. The previous times the metric has spiked to reach a record high include 1929, 2000, and 2021. The first of those years should be familiar: It's when the massive stock market crash that ushered in the Great Depression occurred. We've already discussed the 2000 market plunge. The S&P 500 Shiller CAPE ratio's surge in 2021 preceded the 2022 bear market.

Some might roll their eyes when they hear anyone say that this time could be different for the stock market. People said that during the dot-com boom -- and things didn't end well then. However, there is a pretty good case to be made that this time really is different.