The Inevitable Calibration

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The instruments, as they invariably do, have registered a sustained upward drift. During the preceding cycle – a period demarcated by the arbitrary shifting of calendars, from January 20, 2017, to January 20, 2021 – the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite each ascended, achieving percentages that, while numerically distinct, felt…predetermined. 57%, 70%, and 142% respectively. The numbers themselves offer no solace, merely a confirmation of the expected trajectory.

Since the commencement of the current cycle, beginning again on a designated date – January 20, 2025 – the pattern has, predictably, persisted. Through the closing bell of February 11, the same indices registered further gains: 15%, 16%, and 18%. One begins to suspect the very act of measurement is not a recording of reality, but a self-fulfilling prophecy, a bureaucratic ritual performed to legitimize the inevitable.

There have been, of course, fluctuations. Oscillations, even. Brief moments of turbulence that, while unsettling to those preoccupied with immediate returns, are ultimately absorbed into the overall ascent. Policies, ostensibly designed to stimulate growth – the permanent lowering of a tax rate from 35% to 21% – have merely served as accelerants, fueling a system already predisposed to expansion. The resulting share buybacks are not indications of health, but symptoms of a deeper, more insidious process.

And yet, a disquieting murmur persists. A suggestion, barely audible above the din of rising valuations, that this cannot continue indefinitely. That the very perfection of the system is its most glaring flaw. The possibility of a recalibration – a correction, if one insists on applying such a simplistic term – is not merely a statistical probability, but a fundamental law of the universe, as immutable as gravity.

The Echo of Past Calibrations

It is crucial to understand, though, that history does not predict the future. It merely offers a series of echoes, distorted and incomplete, of events that have already transpired. To believe that the past will repeat itself exactly is a delusion, a comforting fiction. Nevertheless, certain correlations – patterns that emerge from the chaos – deserve our attention, not because they offer guarantees, but because they illuminate the underlying mechanisms at work.

We shall examine three such correlations, not as prophecies, but as diagnostic tools, revealing the subtle stresses and strains within the system.

The Weight of Expectation

The first of these correlations concerns the Shiller Price-to-Earnings (P/E) Ratio, a metric designed to assess the relative valuation of the S&P 500. This ratio, calculated by averaging inflation-adjusted earnings over the preceding decade, has been meticulously tracked back to January 1871. It is a cumbersome calculation, a bureaucratic exercise in historical accounting, yet it provides a useful, if imperfect, gauge of market sentiment.

As of February 11, the Shiller P/E stood at 40.35. This is, we are told, the second-highest valuation in history, surpassed only by the period of irrational exuberance known as the dot-com era. The implication, of course, is that the market is overvalued, that expectations have become detached from reality. The ratio has averaged 17.34 over the last 155 years. The current figure is, therefore, a significant deviation from the norm. History suggests that when the Shiller P/E exceeds 30, trouble inevitably follows. The previous five instances of this occurring resulted in declines of 20% or more.

The timing of such a correction remains uncertain, of course. But the Shiller P/E serves as a warning, a subtle tremor indicating that the foundations are beginning to shift.

The Illusion of Innovation

A second correlation concerns the nature of technological innovation. For decades, it has been observed that every “game-changing” technology is inevitably followed by a period of disillusionment, a bursting of the bubble. This is not a reflection of the technology itself, but rather a consequence of the human tendency to overestimate its potential and underestimate the challenges of its implementation.

Artificial intelligence (AI) is the latest iteration of this pattern. Vast sums of money are being invested in AI infrastructure, driven by the belief that it will revolutionize every aspect of our lives. The “Magnificent Seven” are leading the charge, spending billions on data centers and algorithms. However, there are concerns about optimization. Just because businesses are spending money does not mean they will achieve a return on their investment. It took years for the internet to mature, and the same will likely be true for AI. If and when the AI bubble bursts, the same companies that led the ascent will likely be the first to fall.

The Inevitable Shift in Power

A third correlation concerns the midterm elections. Historically, the party in power tends to lose seats in Congress during midterm elections. This is not a reflection of public opinion, but rather a consequence of the inherent instability of the political system. The upcoming 2026 midterm elections are expected to be particularly contentious, with Republicans holding a slim majority in the House of Representatives. A shift in power could lead to increased volatility and a larger correction in the stock market. According to Carson Group’s Chief Market Strategist, Ryan Detrick, the average peak-to-trough downturn for the S&P 500 during midterm years is 17.5% since 1950.

These three correlations – the Shiller P/E, the illusion of innovation, and the midterm elections – suggest that a double-digit percentage decline in the stock market is likely. However, this does not necessarily mean that a catastrophic crash is imminent.

The Persistence of Hope

While the short-term outlook is uncertain, the long-term prospects remain positive. Corrections, bear markets, and crashes are inevitable, but they are also temporary. The last two crashes were resolved in a matter of weeks. Bull markets, on the other hand, tend to persist for years.

Analysts at Bespoke Investment Group have compiled data showing that the average bull market lasts significantly longer than the average bear market. The longest bear market lasted 630 calendar days, while 14 out of 27 bull markets have lasted longer. If the current bull market continues, it could surpass all previous records.

This data suggests that time in the market is more important than timing the market. The key is to remain patient and focus on the long-term fundamentals.

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2026-02-14 14:42