Will the 2026 stock market face a "valuation crisis"? Federal Reserve data has already signaled it.

The Federal Reserve’s Quiet Warning

Federal Reserve Chair Jerome Powell sounded the alarm as early as September last year — stock prices are “significantly overvalued based on multiple metrics.” Since then, several officials, including Fed Governor Lisa Cook, have spoken out, pointing out that there is a “risk of asset price correction” in the current market. This is not idle chatter but an official warning from the central bank.

Currently, the forward P/E ratio of the S&P 500 has reached 22.2 times, well above the 10-year average of 18.7 times. More notably, historically, whenever this index’s valuation exceeds 22 times, it has been followed by significant declines.

Three Repeating Historical Cases

Internet Bubble Era (2000-2002)
Forward P/E broke through 22 times, with investors paying crazy prices for internet stocks. Ultimately, the S&P 500 fell 49% from its peak.

During the COVID-19 Pandemic (2021-2022)
Forward P/E again exceeded 22 times, with the market underestimating the impact of supply chain disruptions and soaring inflation. The index bottomed out after a 25% decline.

Post-Trump Re-election (2024-2025)
The third time the forward P/E broke 22 times, investors ignored the deep impact of tariff policies. The S&P 500 subsequently declined 19% from its high.

The Midterm Election Curse

Data shows that the S&P 500 has performed poorly in the past 17 midterm election years — averaging only a 1% gain (excluding dividends), far below the long-term average of 9%. Especially in midterm elections when a new president takes office, the index tends to decline by an average of 7%.

The reason is simple: policy uncertainty shatters market confidence. The ruling party usually loses in midterm elections, causing investors to become cautious and capital flows to become uncertain.

But turnarounds often come quickly. Data indicates that the six months following midterm elections (November to April) tend to be the strongest period within a presidential term, with the S&P 500 averaging a 14% increase.

Outlook After 2025

Over the past three years, the S&P 500 has achieved two-digit growth (16% in 2025). Such a streak is hard to sustain. When high valuations meet the political uncertainty of midterm election years, 2026 could become a turning point.

However, the key point is: high valuations do not mean an immediate crash, but history proves they will eventually correct. Instead of predicting specific timing, it’s better to adjust your investment mindset — be prepared for possible volatility.