Key Points
Major indexes, including the S&P 500 (SNPINDEX: ^GSPC), closed out the last month on a high note, experiencing their best quarter in years. However, many economists are not as optimistic about the future.
According to the World Economic Forum’s May 2026 economic outlook survey, a whopping 89% of chief economists expect the global economy to slow over the next 12 months. One in five also believes that the decline will be significant.
The good news is that this doesn’t necessarily mean a recession is imminent. While economists do believe slower growth could lead to greater volatility, 58% of those surveyed do not expect a recession to begin in the next year.
Whatever the future holds, here’s what history suggests investors should do right now to prepare.
History suggests investors should be careful right now
The upside of a surging stock market is that investors reap the rewards as their stocks skyrocket in price. The drawback, however, is that the market is incredibly pricey right now, and some stocks are more likely to be overvalued.
The S&P 500 Shiller CAPE Ratio measures the S&P 500’s 10-year inflation-adjusted earnings, providing a snapshot of the index’s overall valuation. Higher metrics suggest that the index is valued more richly, while a lower ratio implies it may be undervalued.
While this market indicator isn’t an exact science, it can be helpful to see how it’s changed over time. Its long-term average is around 17, and it reached a record high of around 44 just before the dot-com bubble burst. As of this writing, it’s just over 41.
S&P 500 Shiller CAPE Ratio data by YCharts
Again, this doesn’t necessarily mean that a recession or market crash is looming. But it’s rare for the S&P 500 to be this richly valued, and overvalued stocks are much riskier buys right now. When a downturn eventually does hit, those stocks have the furthest to fall.
The best move investors can make right now
No matter when the next downturn begins, investing in quality stocks whose prices match their underlying fundamentals is a historically proven way to weather periods of volatility.
Stock price alone doesn’t necessarily make for a strong investment. Some stocks are more hype than substance, and if you buy at the top, you could face steep losses if that investment faces a pullback. By focusing on stocks with fair valuations, you’ll be better positioned for long-term growth.
There are many factors that go into choosing an ideal stock. Financial metrics such as the price-to-earnings (P/E) ratio and price-to-sales (P/S) ratio are good places to start in determining valuation, but factors such as a competitive advantage and a sustainable business model are equally important for long-term growth.
Now more than ever, it’s crucial to choose your stocks wisely. While the market may be historically expensive, there are still plenty of undervalued stocks poised for significant long-term growth. By loading up on quality investments, you’ll be better prepared for whatever may be ahead for the market.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
