Laurence Allen Warns of Bear Market Risks and Prolonged Flat S&P 500 Returns

Miami, FL — February 17, 2026 — Laurence Allen, veteran asset management executive with more than three decades of experience overseeing teams of traders and portfolio managers, released a new memorandum reminding clients about extended periods when the S&P 500 delivered no return and their causes. For the full analysis and insights, review the memorandum below. 

Time to Remember Bear Markets and their Causes

Memo to clients by Laurence Allen

Executive Summary:

• Today, some investors are concerned about AI disrupting software (and other) companies’ business models, earnings, and stock valuations; similar to early 2000, when the Internet facilitated e-commerce and disrupted traditional bricks and mortar business models.
• This is a good time to remember what happens when investors lose confidence and wait for earnings to show growth for a few quarters – before buying again.
• Bear markets also remind us of the importance of annual income and not to overly rely on price appreciation.
• 2000–2009 is the modern example of an extended bear market when the S&P 500’s decade‑long total return was essentially zero or slightly negative.
• Analysis of 5‑year and 10‑year rolling returns over approximately 90–100 years show that negative or near‑zero total returns are relatively rare – but tend to cluster around major valuation peaks such as 1999-2000, 1960s-1970s, and late 1920s.
• Several multi‑year “sideways” periods stand out in S&P 500 history, where prices made little net progress and real returns (inflation‑adjusted) were poor.
• Periods of zero or negative total returns were usually driven by some mix of high starting valuations, inflation, and major profit or credit shocks that compress price/earnings (P/E) multiples.

Major Flat Return Periods

1. 2000–2009 (“Lost Decade”)
2. 1966–1982
3. 1929-1937 (“Great Depression”)
4. Other shorter periods (e.g., early 1970s inside the 1966–82 range, and 2000–2013 if you look peak‑to‑peak)

2000–2009: The “Lost Decade”

• From 2000–2009, the S&P 500 delivered roughly −0.9% annualized total return.
• In price terms, this period ended the decade around where it started, despite big swings. One study cites an annualized price change of about −7.6% during 2000–2009 before dividends.

Key drivers:

• Starting overvaluation: The dot‑com peak in 2000 featured extreme tech and growth stock multiples, leaving little room for further P/E expansion.
• Two major crashes in one decade: The bursting of the dot‑com bubble (2000–02) and the Global Financial Crisis (2007–09) wiped out large portions of prior gains.
• Weak or volatile earnings: S&P 500 real earnings “vaporized” in both episodes, collapsing from about 76 (real) in 2000 to single digits by 2009 in one analysis, which reinforced low valuations.

1966–1982: Inflation and P/E Valuation Compression

• From the mid‑1960s peak to the early‑1980s, the S&P 500 oscillated in a broad range and generated very low real returns, even though there were positive years in between.
• Price levels in the late 1960s were not exceeded in real terms until the start of the 1980s bull market.

Key drivers:

• High inflation: The U.S. moved through the Great Inflation period; CPI inflation averaged high single digits for much of the 1970s, eroding real equity returns.
• Valuation compression: Market P/Es declined from above 20 in the mid‑1960s to below 10 by the late 1970s, so even growing earnings did not translate into higher index prices.
• Macro shocks: Oil shocks (1973–74, 1979), recessions, and policy uncertainty kept risk premiums elevated and multiples low.

Peak‑to‑Peak Flat Return Periods

• 2000–2013: One chart of the S&P 500 from March 2000 to March 2013 shows roughly 4,700+ days with essentially no net price gain from the original peak.
• 1929–1954 (contextual, pre‑S&P‑500‑as‑we‑know‑it): Earlier composite index data show long stretches where stocks underperformed cash due to starting extremes (1929) and subsequent depressions and wars. Later work notes that from 1929 to 2013, there were ~50 years when cumulative S&P 500 total returns lagged Treasury bills, clustered around high‑valuation peaks in 1929, 1968, and 2000.

Common Patterns behind Flat Return Periods

Across these periods, similar forces show up:

High starting valuation:

• Secular “trips to nowhere” often begin when P/Es and other valuation metrics are at extremes, as in 2000 and 1968.

Inflation vs. nominal returns:

• In the 1970s, nominal returns were modestly positive, but high inflation (around 7–8% in one 14‑year span) drove real equity returns toward zero or negative.

Earnings and credit shocks:

• Periods with multiple recessions, banking/credit crises, or profit collapses (e.g., 2000–02 earnings decline, 2008 financial crisis) prevented sustained price advances.

Sentiment and risk premiums:

• After large drawdowns, investors demand higher expected returns, which means lower P/Es and prolonged sideways action even as fundamentals slowly recover.

How to Anticipate Future Flat Return Periods

To anticipate future flat stock return periods, the historical pattern is:

1. Long sideways periods tend to start from high valuations
2. Are worsened by inflation, repeated shocks, and lack of secondary market liquidity
3. Eventually end when valuations are cheap enough that normal earnings growth and dividends can compound again

Historically, the clearest example of a “flat” S&P 500 period with truly near‑zero (or negative) total return over a full decade is 2000–2009, with a few other long stretches that are close to zero once you adjust for inflation.

Many other “sideways” eras look flat in price but still had a few percent annualized total return because of dividends.

Nominal Total Return Periods even with Dividends

• 2000–2009 (“Lost Decade”)
  • Multiple sources define the lost decade as 12/31/1999 to 12/31/2009, when the S&P 500’s annualized total return was about −0% to −1% per year, roughly a −9% cumulative loss over 10 years.
  • The S&P 500 index “essentially delivered zero returns” over that decade, even including reinvested dividends.

Near‑zero “Real” Total Return Periods after Inflation

Below are periods where nominal returns were positive, but inflation erased almost all of the gain.

Early 1970s to early/mid‑1980s (roughly 1970–1985)

• Analyses of inflation‑adjusted S&P 500 data show that the index failed to sustainably exceed its early‑1970 value in real terms until the mid‑1980s, implying very low or negative real total returns over much of that span.
• Commentary notes this as a time of “S&P stagnation” where a flat nominal market plus very high inflation produced no or negative real growth for equity investors.

Great Depression (approx. 1929–1937)

• Someone buying stocks at the August 1929 level did not see a gain in “real” terms until the early 1950s (not including dividends), implying a long interval of a near‑zero “real” total return.
• These results depend on exact start/end dates and whether deflation years are handled explicitly. But the broad pattern is that the 1930s–40s contained many 10‑ to 20‑year windows with very poor real returns versus cash.
• Well known U.S. company stocks that saw their market valuations collapse over just 60 days from early September 1929 to the end of October 1929 included:

• Companies like Ford faced plunging demand as frightened consumers cut big‑ticket purchases, leading to production cuts and layoffs that wiped out the equity and small businesses tied
• Asian & European Export‑Oriented Businesses (for example, firms tied to commodity exports to the U.S. and Europe) saw revenues collapse as global trade shrank during the Depression, wiping out merchant and landowner fortunes even though the initial market crash was in New York and London. The downturn transmitted through falling prices for agricultural and raw‑material exports, turning previously valuable estates and inventories into liabilities.

Is the S&P 500 Overvalued Today?

• The Shiller CAPE (10‑year cyclically adjusted P/E for the S&P 500 Index) is around 3 in early February 2026, a level near the 2000 dot‑com bubble which peaked at about 44.2.

The Shiller CAPE long‑term median is approximately 16.1 for the period 1871 to February 2026, with a minimum of approximately 4.8 (early 1920s) to a maximum of 44.2 (January 2000).

• The S&P 500 Index “trailing” P/E is about 8 and the “forward” P/E is around 22.4 as of early February 2026, both clearly above the “trailing” median P/E of 15.1 (1871 – Feb 2026) and “forward” median P/E of 18.5 (last 10-years) and 19.7 (last 5-years).
• A mean‑reversion model estimates the S&P 500 Index is trading about 80% above its modern‑era trend, at approximately 3 standard deviations high.
• The Buffett indicator (total US market cap to GDP) is approximately 223% as of early February 2026, significantly above the historical median of 80% and above the January 2000 dot‑com extreme of 175%.

By these historical valuation methods, the S&P 500 is significantly overvalued. So expected long‑term returns from today’s levels are likely below historical norms, even though short‑term price direction is inherently unpredictable.

Bear Market Lessons on Losing and Rebuilding Fortunes

• In May 1929, Winston Churchill went to North America for a paid lecture tour to help pay off debts from a failed political election. Encouraged by friends like financier Bernard Baruch, Churchill borrowed $400,000 and speculated in U.S. stocks on margin near the top of the boom. When the market crashed in October 1929, he lost his net worth and worsened his existing debts.

Thereafter, he focused on monetizing his reputation, particularly after WWII, with income generating work such as paid newspaper and magazine articles, multiple book projects, and paid speaking tours.   

• During 1929-1932, Benjamin Graham (value-investing pioneer) lost roughly 70% of his personal net worth (the stock market lost approximately 85%) largely because he stayed invested. This experience deeply shaped his later conservative, margin‑of‑safety philosophy that underpins modern value investing today.

Thereafter, he doubled down on his disciplined value investing approach, exploited the extremely cheap stock markets in the mid-1930s, and worked for years without a management fee to pay back his investors.

• In general, concentration in one asset class (e.g. equities), heavy leverage, and opaque financial structures repeatedly turned paper wealth into permanent loss – when liquidity vanished.

Those who rebuilt like Benjamin Graham, did so by revising strategies, reducing leverage, and focusing on durable cash‑flow businesses that generated income – instead of depending on speculative price momentum.

Legal Information and Disclosures

The information contained in this memorandum is for educational purposes only and should not be used for any other purpose. This market commentary does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information.  The memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty to update the information contained herein. The author makes no representation, and it should not be assumed that past investment performance is an indication of future results.

About Laurence Allen

For over 30 years, Laurence Allen has served in various executive roles overseeing value-oriented trading and investment management teams typically focused on alternative assets.  He has been a pioneer in developing secondary market liquidity for new asset classes including mortgages, private debt, and alternative assets.

Mr. Allen has been a speaker at numerous private equity and credit conferences including the Institutional Limited Partners Association Conference (Miami), Super Return Middle East Conference (Abu Dhabi), Dow Jones Private Equity Outlook Conference (New York), Private Company Stock Conference (Palo Alto) and Asian Venture Capital & Private Equity Conference (Hong Kong). His background includes serving in various positions with Merrill Lynch and Bear Stearns where his teams advised institutional investors, private funds, and family office clients. He received a BS in Economics with honors and MBA in Finance from the Wharton School at the University of Pennsylvania. He completed the Private Equity & Venture Capital Executive Education Program at Harvard Business School. For further information, please see https://laurenceallen.com/.