Did Federal Reserve Chairman Jerome Powell Deal a Major Blow to the Stock Market With This Six-Word Statement? Past Records Support His Assertion.

Despite some turbulence earlier in the year due to uncertainty around tariffs, 2024 has proven to be an outstanding period for investors. As of the market close on October 6, the well-known S&P 500 ( ^GSPC -2.71%) has achieved 32 record highs, with the legendary Dow Jones Industrial Average ( ^DJI -1.90%) and the growth-driven Nasdaq Composite ( ^IXIC -3.56%) also reaching multiple new closing records.

Both professional and retail investors have been captivated by the enormous potential of transformative technologies such as artificial intelligence and quantum computing, and are optimistic about the Federal Reserve potentially continuing its policy of lowering interest rates to stimulate business borrowing.

Even with all these positive forces seemingly supporting equities, a single remark from Fed Chair Jerome Powell appears to have cast a shadow over the current bull run—and there is ample statistical evidence to support his observation.

Jerome Powell brings Wall Street’s greatest risk into focus

The Federal Reserve’s Board of Governors regularly delivers speeches each month, and Powell is no exception to this routine.

During a recent address in Rhode Island, Powell was asked how the central bank’s leaders factor in stock market performance when shaping monetary policy. While Powell typically avoids giving direct answers about stock valuations, or responds with generic comments, this time he openly discussed what may be the most significant historical risk facing the market today:

We do consider overall financial conditions, and we evaluate whether our policies are influencing those conditions in the way we intend. But you are correct, by several metrics, for instance, stock prices are quite elevated.

This brief statement—“equity prices are fairly highly valued”—is a rare and pointed warning from a Fed leader that few would dare to make.

It’s been nearly three decades since a Federal Reserve chair has so directly suggested that stock valuations are reaching extreme levels. Back in December 1996, then-Chair Alan Greenspan famously coined the term “irrational exuberance” to describe the dramatic rise in internet-related stocks, as well as the S&P 500 and Nasdaq Composite, following the internet’s widespread adoption.

Although “valuation” is inherently subjective and can vary from one investor to another, there is a wealth of historical evidence indicating that Powell’s succinct assessment of the equity market is on target.

By the numbers, this is among the most expensive stock markets ever

Last week, I discussed perhaps the most direct apples-to-apples valuation metric for the S&P 500 over the past 150 years: the Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted P/E ratio or CAPE ratio.

S&P 500 Shiller CAPE Ratio data provided by YCharts.

The Shiller P/E ratio is calculated using average inflation-adjusted earnings over the previous ten years. This approach helps prevent short-term shocks and recessions—which are usually brief—from distorting the valuation, unlike the traditional P/E ratio which can become unreliable during downturns.

On October 6, the Shiller P/E reached 40.23, its highest level in the current bull market and the second-highest for any uninterrupted bull run since January 1871. Historically, the five previous times the S&P 500’s Shiller P/E exceeded 30 and stayed above that threshold for at least two months, the Dow, S&P 500, and/or Nasdaq Composite later experienced drops ranging from 20% to 89%.

Yet, this is just one of several historical measures and correlations suggesting potential trouble for Wall Street.

The market-cap-to-GDP ratio, more commonly called the “Warren Buffett Indicator,” climbed to 221% this week—a new record since data tracking began in January 1970.

This indicator, which Warren Buffett once described as “probably the best single measure of where valuations stand at any given moment,” has averaged 85% over the past 55 years. In other words, the combined value of all publicly traded stocks has typically equaled about 85% of the U.S. gross domestic product (GDP). At present, the market is trading at a 160% premium to this long-term average, which may help explain why Berkshire Hathaway CEO Warren Buffett, who is soon to retire, has been a consistent net seller of stocks for almost three years.

The S&P 500’s price-to-sales (P/S) ratio, based on the trailing twelve months, is also at its highest quarterly level since the fourth quarter of 2000.

As highlighted by Creative Planning Chief Market Strategist Charlie Bilello, the S&P 500’s P/S ratio of 3.33 is more than twice the 25-year median of 1.6.

The story is similar for the S&P 500’s price-to-book ratio. At the peak of the dot-com bubble in March 2000, the index reached 5.06 times the combined book value of its components. By the fourth quarter of 2025, this multiple had climbed above 5.6.

By virtually every historical standard, stock valuations are at extraordinary—and likely unsustainable—levels.

Patience pays off (and is a proven way to succeed in the market)

While Powell’s comments about high valuations are accurate—and historically, such conditions have led to major corrections in the Dow, S&P 500, and Nasdaq—Fed chairs have never been particularly adept at predicting when market downturns will occur.

When Greenspan gave his “irrational exuberance” speech in December 1996, stocks were indeed expensive by historical measures. However, the Nasdaq Composite, driven by tech growth, didn’t reach its peak until March 2000, over three years later. So, even though the current Fed chair sees equity prices as “fairly highly valued,” this doesn’t necessarily mean the market is at or near a short-term top.

What matters most is that history consistently rewards investors who maintain a long-term outlook and keep things in perspective.

Legendary investors like Warren Buffett have achieved lasting success because they recognize that investing is fundamentally a numbers game. There’s little reason to be alarmed by corrections, bear markets, or even crashes, since decades of data show that downturns are typically brief.

Bespoke Investment Group analyzed the duration of every S&P 500 bull and bear market since the Great Depression began in September 1929 and found a notable difference: the average bear market lasted about 9.5 months, while bull markets typically persisted for two years and nine months—roughly 3.5 times longer.

Another study by Crestmont Research, updated annually, calculated the rolling 20-year annualized total returns for the S&P 500 going back to 1900. Although the S&P 500 was officially established in 1923, the total return (including dividends) for its components was tracked in other major indexes from 1900 to 1923 to provide a complete dataset.

Between 1900 and 2024, there have been 106 distinct rolling 20-year periods (1900-1919, 1901-1920, and so forth, up to 2005-2024). Every single one of these periods delivered a positive annualized total return for investors. In other words, anyone who hypothetically bought and held an S&P 500 tracking index for 20 years would have made money every time. Regardless of what challenges the market presents—whether it’s high valuations, recessions, depressions, pandemics, wars, or other crises—patience and a long-term perspective have always resulted in gains for investors who stay the course.

This is an important lesson to remember as Wall Street comes to terms with Jerome Powell’s sobering message.