Will the Stock Market Crash in 2026? What the Numbers Tell Us

It’s a question that’s been rattling investor portfolios: is the market going to crash in 2026? The S&P 500 just wrapped up a stellar 2025 with a 16% gain—its third consecutive year of double-digit returns. But even as stocks continue their rally into early 2026, two critical warning signs are flashing on the valuation dashboard that suggest a market correction could be on the horizon.

Let’s break down what the data is actually telling us and why history matters when thinking about where markets are headed.

Two Red Flags That Suggest a Correction Could Be Coming

The first alarm bell is the S&P 500’s forward price-to-earnings ratio. According to FactSet Research, the index is currently trading at a 22x forward P/E multiple—a level that’s not just elevated compared to its five and ten-year averages, but historically stretched.

To put this in perspective: the last time we saw valuations this extended was during two periods. The dot-com bubble in the early 2000s was one. The other was the COVID-era frenzy around 2020, when central banks were essentially flooding markets with liquidity and interest rates sat near zero. In both cases, what followed wasn’t pretty.

When forward valuation multiples shoot up this dramatically, it usually means investors are pricing in perfection. They’re betting on strong revenue growth, expanding profit margins, and a smooth macroeconomic backdrop. But here’s the catch: if reality doesn’t match the hype, even a decent earnings report can disappoint the market. When that happens, it’s not bad business performance that triggers the sell-off—it’s the gap between expectations and reality.

The second red flag is the S&P 500’s Shiller CAPE ratio, which now sits around 39. This metric takes into account 10 years of corporate earnings (inflation-adjusted) relative to current stock prices, giving us a snapshot of how expensive the market really is on a normalized, long-term basis.

Here’s what history shows us: the last time the CAPE ratio was at these levels was the dot-com peak in early 2000. And when you look back further—to the late 1920s—those peak valuation periods were consistently followed by lower returns. Sometimes much lower.

History Tells Us What Happens After Peak Valuations

Based on these metrics, the historical precedent suggests that is the market going to crash something we should take seriously. A meaningful correction in 2026 seems plausible given the valuation backdrop.

But—and this is important—the real question isn’t whether a pullback happens. It’s how long it lasts and how severe it gets.

Here’s why the outlook is more nuanced than pure pessimism: the market is currently supported by legitimate structural tailwinds. AI, energy transition, and infrastructure spending represent real, long-term growth drivers that aren’t going away anytime soon. These aren’t speculative bubbles; they’re genuine economic forces reshaping productivity and capital allocation.

The outcome will largely depend on two things: how actual earnings stack up against Wall Street’s lofty expectations, and what the Federal Reserve does as economic conditions unfold. If earnings disappoint or the Fed tightens policy aggressively, weakness could accelerate. If earnings surprise to the upside and the Fed stays accommodative, the market could extend its rally despite elevated valuations.

The Smart Move Right Now: Balancing Offense and Defense

If you’re trying to navigate this environment, consider a balanced approach that doesn’t force you to go all-in or sit entirely on the sidelines.

On one side of the equation, continue accumulating positions in established, blue-chip companies with durable business models. These are the kinds of businesses that weather corrections without fundamental damage. Think long holding periods and quality over speculation.

On the other side, keep an ample cash reserve. This isn’t about trying to time the market perfectly. It’s about having dry powder available if and when the market does pull back. History shows that buying weakness has been incredibly profitable for patient, disciplined investors. Every major correction in the S&P 500 has eventually given way to new highs—it’s just a matter of time and temperament.

So, is the market going to crash? Maybe. Historical valuation metrics suggest some form of correction is overdue. But corrections aren’t catastrophes if you’re positioned correctly. They’re opportunities.