Market Valuation Signals and 2026: When Will the Stock Market Crash?

The S&P 500 delivered impressive performance in 2025, with a 16% gain marking the third consecutive year of double-digit returns. Yet beneath this bullish surface, growing concerns suggest the market may face significant headwinds in 2026—a year when stock market crash scenarios become increasingly plausible. Federal Reserve officials have begun raising red flags about stretched asset prices, and several structural factors point toward potential turbulence ahead.

In September, Federal Reserve Chair Jerome Powell stated that equity valuations appeared “fairly highly valued” across numerous metrics. Since that warning, the index has climbed further, pushing price-to-earnings multiples into uncomfortably elevated territory. This combination of timing and valuation extremes raises a critical question: Is a market correction imminent?

Stretched Valuations Present a Historical Warning Signal

The S&P 500 currently trades at a forward price-to-earnings ratio of 22.2, according to Yardeni Research—a premium of 3.5 times above the 10-year average of 18.7. This elevated pricing has triggered concern within Federal Reserve leadership. During the October FOMC meeting, minutes revealed that several participants flagged “stretched asset valuations,” with officials cautioning about “the possibility of a disorderly fall in equity prices.” Fed Governor Lisa Cook reinforced this perspective in November, noting “an increased likelihood of outsized asset price declines.”

Critically, the S&P 500 has rarely traded above 22 times forward earnings, and each occurrence offers a sobering historical precedent. When the index reached such expensive valuations during the dot-com bubble of the late 1990s, it subsequently fell 49% by October 2002. During the 2021 valuation peak amid pandemic-era stimulus programs, the index dropped 25% by October 2022. Most recently, following the 2024 valuation spike related to optimism around tariff policies, the S&P 500 declined 19% by April 2025. None of these declines proved permanent, but each demonstrated that extreme valuations eventually correct sharply.

Midterm Election Years Have Historically Challenged Market Performance

Beyond valuation concerns, the calendar itself presents risks. Midterm election years create distinct market dynamics. Since the S&P 500’s inception in 1957, the index has navigated 17 midterm election cycles and generated an average return of just 1% during those years—a stark contrast to the 9% annual average since inception. When a sitting president’s party faces the midterms, performance has been particularly weak. The index has declined an average of 7% during those specific periods.

Why does this pattern emerge? Political uncertainty weighs on investor sentiment. Midterm elections typically result in the ruling party losing Congressional seats, raising questions about the continuity of economic policy. During these periods of unpredictability, market participants hesitate, capital flows become cautious, and equity indexes tend to retreat. However, this pattern does not persist indefinitely. According to Carson Investment Research, the six months following midterm elections (November through April) represent the strongest trading period within the four-year presidential cycle, averaging 14% returns. This suggests any 2026 correction could prove temporary.

Combining These Factors: A Recipe for Market Caution

While neither elevated valuations nor midterm-year timing guarantees a decline, their convergence warrants investor caution. The stock market crash scenario becomes credible when assessed through multiple analytical lenses. The Federal Reserve’s repeated emphasis on valuation risk, combined with historically weak midterm performance and current PE multiples that have preceded every sharp pullback since the 1990s, suggests 2026 deserves heightened defensive positioning.

The question of when exactly the market might encounter its correction remains unanswerable—market timing rarely works. However, recognizing that conditions appear increasingly conducive to volatility allows investors to adjust portfolio construction accordingly. Past cycles demonstrate that stock market crash episodes, while uncomfortable, eventually give way to recovery periods. The key lies in understanding current conditions and positioning accordingly.