The S&P 500 just flashed a rare market warning — and could change how Canadian investors think about risk moving forward

Even so, this doesn’t mean a market crash or recession is brewing. While the CAPE ratio shows that stocks are currently pricey compared to the past, it can’t predict exactly when the market might drop.

It’s also worth noting the difference for Canadians: As of January 1, 2026, Canada’s S&P/TSX Composite Index had a CAPE ratio of 26.20 — high, but still well below the U.S. reading. This gap matters for Canadians thinking about how and where to invest their retirement savings.

A price tag from the past

A traditional price-to-earnings ratio looks at a company’s earnings just over the past year. However, the CAPE ratio measures a company’s earnings over the past decade, adjusted for inflation, which smoothes out the ups and downs of economic booms and recessions. It can also be used to measure whole market indexes, not just individual companies.

For example, a CAPE ratio of 41.33 means investors are paying roughly $41.33 for every $1 of inflation-adjusted earnings generated over the previous 10 years.

According to Shiller’s research, higher CAPE ratios tend to mean lower returns over the long term. But they’re not good at predicting exactly when a downturn will begin. For instance, the ratio stayed high for years during the late 1990s before the dot-com bubble finally burst.

Valuation tools like the CAPE ratio aren’t meant to predict exactly when the market will peak. Instead, they’re best used to check your risk level and make sure your portfolios are well diversified. In other words, it’s not a market-timing tool — it’s more like a risk-management tool.

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Don’t put all your eggs in one index

The old advice to just “buy the index” to spread out your risk may not work as well any longer. More of the S&P 500’s total weight is piling up in just a few companies. By the end of 2025, the 10 largest entities made up nearly 41% of the entire S&P 500, way up from only 19% at the end of 2015.

The trend here is known as the “Great Narrowing,” and it’s especially strong in the tech sector. The S&P 500 now leans so heavily on these dominant companies that it acts more like a tech-focused fund than a broad mix of the global economy.

A situation like this could become a problem, as many of these tech giants are deeply connected to each other through artificial intelligence (AI). They’re spending billions of dollars building AI infrastructure — and much of that money simply moves between the same handful of companies. For example, one company buys advanced microchips from the other, while a third leases massive cloud data centres from a fourth, and so on.

A funding loop like this means these companies’ profits heavily depend on each other. If one company runs into trouble, it could set off a chain reaction that hurts the earnings of all the top companies in the index.

For the average Canadian investor, this means a standard retirement portfolio with significant S&P 500 exposure is especially vulnerable if only one sector — like tech — runs into trouble. As a result, Canadians might want to look beyond U.S. stocks and consider other types of investments that may react differently when the economy changes.

On the other hand, the S&P/TSX Composite Index leans more heavily toward financials, energy and materials — sectors that often respond differently to economic shocks than tech does. This natural variety is one reason why some Canadian portfolio managers say it makes sense to hold a solid mix of Canadian stocks alongside U.S. investments.

Looking beyond the stock market

To lower risk, some investors go beyond stocks and bonds by adding other types of investments to their portfolios.

Real estate is one of the most common ways Canadians build wealth outside the stock market. According to Statistics Canada, home equity makes up 42% of all household wealth — and that number is even higher among younger families, who often have nearly half their wealth tied up in their dwellings.

According to TD Economics, Canadian household net worth rose to $18.6 trillion in the last quarter of 2025, mostly due to investment gains. But Canadian households also owe $1.77 for every dollar they earn — a reminder that not all wealth can be easily turned into cash, and that putting too much into one type of asset comes with risk.

Rental properties and investment real estate have long been a reliable source of steady income for wealthier investors. For those who want to invest in real estate without the responsibilities of owning and managing a property, real estate investment trusts (REITs) — many of which trade on the TSX — offer an easier way in, with lower costs and a built-in mix of properties.

The art of diversifying

Large institutions have been spreading out their investments for a long time, putting money into different types of assets so they don’t rely too heavily on any one class. Canada’s own Canada Pension Plan Investment Board (CPP Investments) — the Crown corporation that manages retirement funds for more than 22 million Canadians — actively touts how its portfolio is “invested across a wide range of asset classes and geographies.”

CPP Investments ended fiscal 2026 with $793.3 billion in net assets, earning an average return of 8.8% a year over the past 10 years. Its strategy — spreading money across different types of investments that don’t all rise and fall together — is widely regarded as a smart way to manage risk.

Billionaires and family offices have done something similar, putting some of their money into investments that don’t rise and fall with the stock market — like fine art, private loans and commodities such as gold or oil.

Most everyday investors can’t access the same private markets as CPP Investments or the world’s wealthiest families. But the basic idea still applies: Spreading your money across different asset types — including some that don’t move with the stock market — can lower your overall risk.

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All that glitters

Gold has historically attracted investors during periods of inflation, global uncertainty and shaky markets.

While gold prices can regularly rise and fall, research suggests gold is, on average, a good way to protect against economic uncertainty — and a safe place to put your money when markets get extreme.

For Canadians who want gold as part of their retirement plan, there’s a little-known option with big tax advantages: holding eligible gold bullion inside a self-directed RRSP or TFSA. Since 2005, the Canada Revenue Agency (CRA) has allowed specific types of high-quality gold and silver to be held inside these accounts, under rules set out in the Income Tax Act, Section 204.