Is 2026 Shaping Up to Be a Market Crash Year? What the Fed's Recent Comments Reveal

When Will the Stock Market Crash? Federal Reserve Officials Sound the Alarm on Valuations

The S&P 500 delivered impressive returns in 2025, gaining 16% and marking three consecutive years of double-digit performance. Yet beneath this surface-level success lies a growing concern among monetary policymakers: the market might be dangerously overpriced. When Federal Reserve Chair Jerome Powell warned in September that equity valuations appeared “fairly highly valued” by numerous metrics, he wasn’t making an off-the-cuff remark. His comments reflect a broader institutional anxiety about where the stock market could be headed—particularly in 2026.

The timing matters. Not only do valuations look stretched by historical standards, but 2026 is a midterm election year, a period historically associated with market turbulence and investor hesitation. This combination raises a critical question for portfolio managers: Is the market crash coming in 2026?

When Is the Market Going to Crash? A Look at Midterm Election Year Performance

History offers a sobering lesson. Since the S&P 500 was created in 1957, the index has endured 17 midterm election cycles. During those years, the index returned an average of just 1% (excluding dividends)—a stark contrast to its 9% annualized performance across all years since inception.

The pain intensifies when the sitting president’s party faces electoral headwinds. When a new president holds office during midterms, the S&P 500 has declined by an average of 7%. Why? Midterm elections inject profound uncertainty into policy-making. Markets abhor ambiguity. Investors cannot predict whether the ruling party will retain enough congressional seats to maintain the president’s economic agenda, leading to broad-based selling pressure.

However, this gloom doesn’t last forever. According to Carson Investment Research, the six-month period following midterm elections—specifically November through April—has historically represented the strongest segment of any four-year presidential cycle. The S&P 500 has averaged 14% returns during this window. So while 2026 may prove difficult, the latter half of 2026 and early 2027 could offer substantial recovery opportunities.

Why the Federal Reserve Is Worried: An Unprecedented Valuation Disconnect

Jerome Powell is hardly alone in flagging valuation concerns. The October meeting minutes from the Federal Reserve’s policy committee included this warning: “Some participants commented on stretched asset valuations in financial markets, with several of these participants highlighting the possibility of a disorderly fall in equity prices.”

Fed Governor Lisa Cook reinforced this message in November, stating: “Currently, my impression is that there is an increased likelihood of outsized asset price declines.” The central bank’s Financial Stability Report further emphasized that the S&P 500’s forward price-to-earnings (PE) ratio sits “close to the upper end of its historical range.”

The numbers back up this concern. The S&P 500 currently trades at a forward PE multiple of 22.2x—a premium of 3.5 points above its 10-year average of 18.7x. This matters because the S&P 500 has only breached the 22x forward earnings threshold three times in recorded history, and each instance preceded a significant market decline:

The Dot-Com Era (late 1990s): Speculation in internet stocks drove the forward PE ratio above 22. By October 2002, the S&P 500 had crashed 49% from its highs, wiping out trillions in wealth.

The Pandemic Boom (2021): Investors underestimated the inflationary impact of supply chain disruptions and stimulus spending, pushing forward PE ratios to 22x. The index subsequently fell 25% from peak by October 2022.

The Trump Rally (2024-2025): Market enthusiasm around tariff policies and deregulation pushed valuations above 22x again in 2024. Even as tariffs began to roil markets, the index dropped 19% from its highs by April 2025.

The pattern is unmistakable: A forward PE ratio exceeding 22 does not guarantee an immediate crash, but it has consistently preceded sharp corrections. When paired with midterm election year headwinds, the probability of market stress in 2026 rises substantially.

Preparing Your Portfolio for 2026’s Potential Turbulence

So when is the market going to crash in 2026? No one can predict the exact timing or magnitude. However, prudent investors should prepare for volatility. The convergence of stretched valuations and midterm political uncertainty creates an environment where caution outweighs complacency.

Rather than trying to time a potential crash, consider adopting a barbell strategy: maintain core holdings in quality businesses, but diversify into less correlated assets that can cushion portfolio downside. History shows that even difficult midterm years eventually give way to recovery—the question is simply whether you’re positioned to weather the interim turbulence.