With only a few trading days remaining in 2025, it's safe to say the stock market has once again delivered for investors. As of the close on December 24th, the widely followed Dow Jones Industrial Average, the benchmark S&P 500, and the growth-driven Nasdaq Composite had climbed 15%, 18%, and 22%, respectively. While investors—including Wall Street analysts and commentators—widely anticipate this steady ascent will continue into the new year, not everyone shares this optimism. One of the more measured critics on Wall Street is one of America's most influential policymakers: Federal Reserve Chairman Jerome Powell.
Typically, Powell and other Fed governors avoid direct commentary on stock market performance. The Fed's core mission is to set monetary policy aimed at achieving maximum employment and price stability; the fluctuations of the stock market are, relative to these primary goals, a secondary consideration. That said, Powell, whose term expires in May 2026, recently responded to a question by explicitly mentioning the potential influence of stock valuations on the Federal Open Market Committee's (FOMC) policy decisions. As the 12-member policymaking body (which includes Powell), the FOMC's core responsibilities include adjusting the federal funds rate and conducting open market operations to achieve its monetary policy goals. Powell stated, "We do look at overall financial conditions and ask ourselves whether our policies are affecting those conditions in the expected way. But you're right, for example, by many measures, stock prices are at quite high valuation levels." The emphasis of his response lies in the final sentence: "stock prices are at quite high valuation levels."
Valuation is subjective—what seems expensive to one may seem reasonable to another—but one historically tested objective metric provides strong support for Powell's assertion that the market is at historic highs: the S&P 500's Shiller P/E ratio, also known as the Cyclically Adjusted PE Ratio (CAPE). This metric, which smooths out earnings fluctuations using a ten-year average, accurately captures the core fact that current stock prices are indeed at very high valuation levels.
This metric dates back to January 1871, spanning 155 years. Its historical average is 17.32x, but as of the close on December 24th, it had surged to 40.74x, just a step away from the current bull market high of 41.20x and nearing the historical peak of 44.19x set in December 1999 before the dot-com bubble burst. Historical experience shows that a Shiller P/E ratio exceeding 30x has never been sustainable over the long term. It has occurred only six times in 155 years, including the present; following the previous five instances, the Dow Jones, S&P 500, and/or Nasdaq Composite ultimately fell between 20% and 89%. It's important to remember that when overall market valuations are far above historical norms, they don't mean-revert overnight. Even after Powell departs in May 2026, his final words will continue to echo on Wall Street.
While the Shiller P/E is not a market-timing tool, and Fed Chair commentary can be wrong—Alan Greenspan's famous "irrational exuberance" speech preceded the market peak by over three years—this metric maintains an impeccable, almost undeniable, record in signaling stock market risk. History alone allows us to assert that significant corrections, bear markets, and elevator-like plunges are not a matter of "if," but "when." Most investors naturally dislike emotionally-driven declines, but these storms carry a silver lining. Watching account balances flash red is uncomfortable, yet corrections, bear markets, and even crashes are healthy and inevitable parts of the investment cycle. Wall Street's pendulum swings both ways, and occasional downturns are simply the price of admission to the world's most powerful wealth-creating machine.
However, it is crucial to note that market cycles are not mirror images of each other. In June 2023, shortly after the S&P 500 rallied more than 20% from its 2022 bear market low, officially entering a new bull market, Bespoke Investment Group published data on X (formerly Twitter) comparing the duration of every S&P 500 bull and bear market over the previous 94 years. On one hand, since the start of the Great Depression in September 1929, the average S&P 500 bear market lasted just 286 calendar days—about 9.5 months—before ending; most emotionally-driven "elevator" declines are fleeting. On the other hand, from September 1929 to June 2023, the average S&P 500 bull market lasted 1,011 calendar days, 3.5 times longer than the typical bear market. While markets rise and fall, they spend a disproportionate amount of time rising.
In fact, every previous correction, bear market, and crash experienced by the Dow Jones, S&P 500, and Nasdaq has ultimately been erased by subsequent bull markets. Therefore, although Powell's comments on valuation point to historical headwinds that could cause Wall Street to run aground in 2026, time has repeatedly proven that for long-term investors, it eventually heals all short-term wounds.
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