Will the Stock Market Crash in 2026? The Federal Reserve Has a Warning for Investors.

1 week ago 8

Trevor Jennewine, The Motley Fool

Mon, January 5, 2026 astatine 2:35 AM CST 5 min read

In September, Fed Chair Jerome Powell warned that stocks were "fairly highly valued" by galore measures; different Federal Reserve officials person since made akin comments.
The S&P 500 has historically performed poorly up of midterm elections, but the scale usually delivers robust returns during the six months pursuing them.
The S&P 500 presently trades astatine 22.2 times guardant earnings, an costly valuation that has ever (eventually) coincided with a steep diminution successful the index.
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The S&P 500 (SNPINDEX: ^GSPC) precocious 16% successful 2025, the 3rd consecutive twelvemonth wherever the benchmark scale has posted double-digit returns. However, the banal market's winning streak could travel to an extremity successful 2026. Midterm predetermination years are typically hard for investors, and valuations are elevated by humanities standards.

In September, Federal Reserve Chairman Jerome Powell warned, "By galore measures... equity prices are reasonably highly valued." The S&P 500 has accrued since past and valuations person go much stretched. In fact, the scale presently has 1 of its astir costly terms tags successful history.

Federal Reserve Chairman Jerome Powell speaks astatine an FOMC event.

The S&P 500 has been done 17 midterm elections since its instauration successful 1957, and it has returned an mean of 1% (excluding dividends) during those years. That is good beneath the yearly mean of 9% since 1957. The S&P 500 has performed peculiarly poorly during midterm elections erstwhile a caller president holds office. The scale has declined by an mean of 7% successful those years.

Why does that happen? Midterms elections make argumentation uncertainty, particularly due to the fact that the governmental enactment of the existent president tends to suffer seats successful Congress. Markets thin to autumn during periods of uncertainty due to the fact that investors are unsure wherever to enactment their money. Will the governmental enactment successful powerfulness suffer capable seats successful Congress to disrupt the president's economical agenda?

Fortunately, argumentation uncertainty clears quickly. The six months aft the midterm elections (i.e., November to April) person historically been the strongest of the four-year statesmanlike cycle, according to Carson Investment Research. The S&P 500 has historically returned an mean of 14% during that period.

Chairman Jerome Powell is not the lone Federal Reserve authoritative to pass investors astir the banal market's affluent valuation. Minutes from the October FOMC gathering stated, "Some participants commented connected stretched plus valuations successful fiscal markets, with respective of these participants highlighting the anticipation of a disorderly autumn successful equity prices."