Bond Spreads Reach Dot-Com Levels and CAPE Signal S&P Slump Ahead

Wary signals are flashing: credit spreads on investment-grade bonds have narrowed to about 71 basis points—the tightest since 1998—raising the risk of a bond sell-off if economic conditions worsen, while the stock market's CAPE ratio sits at 40.1 in January 2026, the highest since the dot-com era. If history repeats, the S&P 500 could fall roughly 3% in 1 year, 19% in 2 years, and 30% in 3 years, with little chance of a positive return; though AI-driven earnings could mute the move, the current setup favors caution: trim risk, and limit stock purchases to high-conviction ideas.