The U.S. stock market has delivered impressive returns in 2026 despite economic uncertainty surrounding persistent inflation and elevated energy prices tied to the Iran conflict. Year to date, the broad-based S&P 500 (^GSPC -0.25%) has added 13%.

Strong corporate financial results have been the driving force behind the stock market's double-digit gains. In fact, the current earnings represent the strongest fundamental environment outside of a post-recession recovery in more than 50 years, according to Wolfe Research.

Nevertheless, the S&P 500 recently flashed a warning last seen during the dot-com crash, and it hints at big losses during the next two or three years. Here is what investors need to know.

The stock market is flashing a warning last witnessed during the dot-com crash

In 1988, economist Robert Shiller introduced the cyclically adjusted price-to-earnings (CAPE) ratio as a means of evaluating entire stock market indexes. Whereas the traditional price-to-earnings ratio can be distorted by cyclical changes in earnings, the CAPE ratio eliminates that noise by averaging inflation-adjusted earnings from the past decade.

The S&P 500 recorded an average CAPE ratio of 40.6 in July, the third consecutive monthly reading above 40. Not only is that well above the 20-year average of 28, but the last three months mark the first time since the dot-com crash that the S&P 500's monthly CAPE ratio has topped 40.

Unfortunately, the index's rich valuation hints at a substantial drawdown in the stock market. The chart below shows the S&P 500's best, worst, and average returns over different time periods after recording a monthly CAPE ratio above 40.

Time Period S&P 500's Best Return S&P 500's Worst Return S&P 500's Average Return 1 Year 16% (28%) (3%) 2 Years 8% (43%) (19%) 3 Years (10%) (43%) (30%)

The chart above shows two particularly important things. First, the S&P 500 has never generated a positive three-year return following a monthly CAPE reading above 40. Second, if the S&P 500's future returns match the historical average, the index will drop 30% by August 2029.

Of course, past performance does not guarantee future results. While the CAPE ratio did predict the dot-com crash, the internet boom was different from the artificial intelligence (AI) boom. The internet did not reach mainstream adoption for more than a decade, but AI has achieved mainstream adoption in under five years.

In fact, AI has become one of the "fastest-adopted technologies in history, with nearly one in four American firms deploying it at scale," according to Justin Bieman, global investment strategist at JPMorgan Chase. That means AI could become a material source of corporate profits more quickly than the internet.

So what? The CAPE ratio is a backward-looking metric, meaning it does not account for the possibility that earnings growth will accelerate. Earnings growth failed to keep up with stock price appreciation during the dot-com bubble, which ultimately led to a market crash. But if earnings keep up with stock prices during the AI boom, the S&P 500 may continue moving higher while its CAPE ratio drops to something more reasonable.

Wall Street analysts expect the S&P 500 to increase 18% in the next year

S&P 500 companies reported exceptionally strong financial results in the first quarter of 2026. At the index level, revenue increased 11.4% (the fastest growth since Q2 2022), and earnings increased 28.6% (the fastest growth since Q4 2021), according to FactSet Research.

Wall Street expects similar results in the coming quarters. For the full year, the consensus estimate says revenue will grow 11% (the fastest pace since 2022), and earnings will grow 27% (the fastest pace since 2021). At the sector level, analysts anticipate the strongest earnings momentum across the technology (50%), communication services (54%), and energy (77%) sectors.

In turn, Wall Street analysts anticipate substantial upside in the S&P 500 over the next year. The median forecast puts the S&P 500 at 9,106 in August 2027. That implies 19% upside from its current level of 7,722. With that in mind, investors should be cautiously optimistic about where the stock market is headed in the near term.