We Just Witnessed an Ultra-Rare S&P 500 Event That's Occurred 5 Times in 55 Years -- and History Is Crystal Clear What Comes Next

Key Points

In spite of a mini-crash in early April, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all recently rallied to fresh record-closing highs. The Federal Reserve reduced interest rates in late October, marking a rare occurrence where it cut rates with Wall Street's broad-based index at an all-time high. Stocks remain historically pricey -- but there's no way to effectively gauge when corrections will take place.10 stocks we like better than S&P 500 Index ›

It's been quite the ride for Wall Street's major stock indexes in 2025. In early April, the benchmark S&P 500(SNPINDEX: ^GSPC), iconic Dow Jones Industrial Average(DJINDICES: ^DJI), and growth stock-dominated Nasdaq Composite(NASDAQINDEX: ^IXIC) endured a short-lived crash that sent the former two firmly into correction territory and the latter into its first bear market since 2022.

But over the last seven months, it's been all systems go for the stock market. The S&P 500 produced one of its strongest three-month returns in its storied history following the early April swoon, with all three indexes recently leaping to record-closing highs. In fact, the gains of Wall Street have been so pronounced that chatter of a bubble has begun picking up steam.

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When stock market volatility is heightened, or when stocks seemingly ascend to the heavens, it's not uncommon for investors to seek out correlative events from the past to predict where stocks might head in the future. Even though these correlations can't concretely forecast what's to come, some have a phenomenal track record of foreshadowing the future.

Image source: Getty Images.

A little over one week ago, we witnessed one of these highly correlative events with the broad-based S&P 500 -- and history couldn't be any clearer about what comes next for stocks.

This has been observed only four previous times since 1970

With the federal government shutdown ongoing, there hasn't been much economic data for investors to digest. This meant the highlight for October was going to be the Oct. 28-29 Federal Open Market Committee (FOMC) meeting.

The FOMC consists of 12 members of the Federal Reserve and is responsible for guiding the nation's monetary policy. It does this by adjusting the federal funds rate, which influences the interest rates tied to lending, and can indirectly influence mortgage rates. The nation's central bank can also use open market operations, such as the purchasing or selling of long-term U.S. Treasuries, to influence long-term bond yields (the price and yield of a bond are inversely related).

All eyes were on the FOMC's Oct. 29 announcement, which lowered the federal funds rate by 25 basis points to a fresh range of 3.75% to 4%. Reducing this rate makes it less costly for banks to lend to each other on an overnight basis.

What made this FOMC decision so interesting and rare is it marked only the fifth time since 1970 that interest rates were lowered with the S&P 500 at an all-time high. This fact comes courtesy of J.P. Morgan Private Bank (the company's private banking and wealth management arm), with data assistance from Bloomberg Finance.

JPM: "today will be the fifth time that the Fed cuts rates with the S&P 500 at all-time highs. All prior instances the S&P 500 was higher a year later with an average return of 20%. The worst one-year return was a 15% gain which occurred last year." pic.twitter.com/ExtLTgLguo -- zerohedge (@zerohedge) October 29, 2025

J.P. Morgan notes that, on average, the benchmark S&P 500 was higher by 20% one year following the four previous rate cuts at an all-time high, with the worst return of the bunch being a 15% gain. The lowest return of the four prior events occurred last year when the nation's central bank kicked off its rate-easing cycle.

There is logic behind the notion that stocks should continue to rally as the FOMC eases interest rates. Every rate cut makes borrowing less costly, which in turn can encourage businesses to hire workers, make acquisitions, and invest aggressively in innovation. It tends to be a recipe for economic growth.

With the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite being fueled by the artificial intelligence (AI) revolution, lower lending rates may be able to boost existing corporate growth rates and sustain historically high valuation premiums. It was the ideal recipe for the stock market last year, and it might continue to be, based on what history tells us, over the next year.

But while this historical correlation has a flawless track record of forecasting future upside over the subsequent 12 months for the S&P 500, another tool, with an equally pristine prediction record, paints a different picture.

Image source: Getty Images.

The second-priciest stock market on record would like a word...

Though historical data clearly shows that the S&P 500 rockets higher following Federal Reserve rate cuts while trading at an all-time high, one time-tested valuation tool has acted as a harbinger of future disaster for the benchmark index.

When the word "value" comes into play, most investors probably think of the traditional price-to-earnings (P/E) ratio. The P/E ratio, which is arrived at by dividing a company's share price by its trailing-12-month earnings per share (EPS), is a fantastic tool for quickly sizing up mature businesses during long-winded periods of economic expansion.

The problem with the P/E ratio is that it becomes relatively useless during recessions if EPS turns negative, and it doesn't account for corporate growth rates. While all valuation tools have their flaws, the one that provides the closest thing to an apples-to-apples comparison -- and has a flawless track record of forecasting the future -- is the S&P 500's Shiller P/E Ratio. Note: the Shiller P/E is also referred to as the cyclically adjusted P/E Ratio, or CAPE Ratio.

Rather than being based on trailing-12-month EPS like the traditional P/E ratio, the Shiller P/E accounts for average inflation-adjusted EPS over a 10-year period.

S&P 500 Shiller CAPE Ratio data by YCharts.

When back-tested to January 1871, the Shiller P/E has averaged a multiple of 17.31. In late October, it peaked at 41.20 during the current bull market. It's the second-highest CAPE Ratio during a continuous bull market in 154 years, and represents the sixth instance of a sustained multiple above 30.

Following the five prior occurrences where the Shiller P/E topped 30, the S&P 500, Dow Jones Industrial Average, and/or Nasdaq Composite shed 20% to 89% of their respective value. Based solely on historical correlation, a peak multiple of 41.20 would set the benchmark index up for, at minimum, a coming bear market.

But here's the caveat to this historical correlation: the Shiller P/E isn't a timing tool.

Although a sustained multiple above 30 has been a harbinger of disaster on a back-tested basis, there's no blueprint as to how long stocks can stay expensive.

While we know they don't trade at a premium for extended periods, stocks remained pricey for three years leading up to the bursting of the dot-com bubble. This suggests both of these historically flawless forecasting tools -- rate cuts at an all-time high and a Shiller P/E above 30 -- can coexist, with the stock market continuing to power higher in the short run, and the Shiller P/E pointing to a growing likelihood of a steep decline in the years to come.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.