High Valuations Raise Crash Risk, but History Favors Staying Invested

The S&P 500 is nearing valuation levels last seen around the 2000 dot-com peak, raising the risk of a sharp fall. But The Motley Fool’s central advice is not to sell: it says investors should stay invested through market swings.

The index’s Shiller CAPE ratio, which compares prices with ten years of inflation-adjusted earnings, was 40.9 in August, according to YCharts data cited by The Motley Fool. It stood near 44.2 at the dot-com peak. High valuations can signal lower long-term returns, but they do not tell investors when a downturn will begin.

The article points to several risks. On September 16, the Federal Reserve raised its benchmark rate by a quarter-point, to a range of 3.75% to 4%. Higher borrowing costs can weigh on household spending and make it more expensive for companies to fund expansion. Fed officials also signaled another increase may come later this year.

The Motley Fool also cites higher oil prices, inflation and uncertainty about artificial-intelligence investment. A slowdown in AI spending could pressure chipmakers such as Nvidia and Micron, whose shares have helped drive market gains. These are risks, not evidence that a crash is certain.

History offers context, not a timetable. Capital Group’s data puts a 20% or greater S&P 500 decline at roughly once every six years. The index has returned about 10.7% annually since its 1957 launch, including dividends, according to figures cited in the article.

That long-run average does not mean investors avoid painful losses or recover quickly after buying near a peak. The CAPE ratio is better treated as a warning about valuation and future-return expectations than as a signal to time a selloff. Investors weighing their next move can review whether their holdings are diversified and whether they can withstand a prolonged decline.

The distinction matters: a bear market is a drop of at least 20%, but valuation alone cannot say when one will happen. For long-term investors, the historical lesson is to avoid making an all-or-nothing decision based on a crash forecast.