Could the Stock Market Crash in 2026? Fed Officials Are Raising Serious Valuation Concerns

As we move deeper into 2026, investors are grappling with mounting concerns about whether the stock market’s winning streak is finally coming to an end. After posting impressive double-digit returns for three consecutive years—with the S&P 500 gaining 16% in 2025 alone—the fundamental question now is whether this rally can sustain. Two major factors are converging to create a potentially volatile year: we’re in a midterm election cycle, and the market is trading at historically expensive valuations.

In recent months, top Federal Reserve officials have sent unmistakable signals about their concerns. Fed Chair Jerome Powell declared in September that equity prices were “fairly highly valued by many measures,” a remarkably candid warning from the nation’s central banking chief. That message has only grown louder. The FOMC’s October meeting minutes noted that some participants flagged “stretched asset valuations,” with several highlighting the “possibility of a disorderly fall in equity prices.” Fed Governor Lisa Cook reinforced this cautionary tone in November, stating that “there is an increased likelihood of outsized asset price declines.”

Double Trouble: Why This Year Could Be Particularly Treacherous

The 2026 outlook becomes more concerning when you layer midterm election dynamics on top of current valuations. History shows that midterm years have been consistently problematic for stock investors. Since the S&P 500’s creation in 1957, the index has been through 17 midterm election cycles, averaging just 1% returns during those years—far below the historical 9% annual average.

The picture gets darker when a sitting president faces midterms. Under those circumstances, the S&P 500 has declined by an average of 7%. The culprit is familiar to market veterans: policy uncertainty. When the sitting president’s party typically loses congressional seats, investors struggle to navigate the implications for future economic policy, and prices fall. What makes this pattern particularly relevant today is that the near-term political environment may amplify existing market hesitations stemming from elevated valuations.

The silver lining, historically, comes after the fact. The six months following midterm elections—from November through April—have historically delivered the strongest returns of any period in the four-year presidential cycle, with average gains around 14%. However, investors still must navigate the challenging months ahead.

When Valuations Reach Dangerous Levels: A Historical Perspective

The more concerning risk factor is the market’s current price tag. The S&P 500 is trading at a forward price-to-earnings ratio of 22.2 times, according to recent market data. This premium sits well above the 10-year average of 18.7 times.

What makes this particularly noteworthy is that only three other periods in stock market history have seen forward PE ratios exceed 22, and each time a substantial market correction followed:

The Dot-Com Era (Late 1990s): When investors paid astronomical prices for speculative internet companies, the forward PE surged above 22. The eventual reckoning came swiftly—by October 2002, the S&P 500 had plummeted 49% from its peak.

The Pandemic Boom (2021): As stimulus flowed and supply-chain disruptions proved more severe and inflation-spurring than expected, valuations again climbed above 22. The market subsequently surrendered 25% by October 2022.

The Post-Election Surge (2024-2025): Following the 2024 presidential election, optimism about pro-business policies pushed the forward PE above 22. However, tariff announcements and their market implications triggered a 19% correction by April 2025.

The critical takeaway isn’t that PE ratios above 22 guarantee an imminent crash, but rather that the S&P 500 has consistently experienced sharp downturns after reaching such elevated valuations. Combined with the historical headwinds of midterm election years, the probability of market weakness in 2026 becomes hard to dismiss.

What This Means for Investors Right Now

The Federal Reserve isn’t issuing these warnings casually. The central bank’s Financial Stability Report explicitly noted that the S&P 500’s forward PE ratio remains “close to the upper end of its historical range.” Multiple Fed officials have now echoed concerns about asset valuations, suggesting this isn’t an isolated perspective but rather an institutional consensus.

The convergence of midterm election-year dynamics and stretched valuations creates a reasonable basis for caution. While market crashes are notoriously difficult to predict with precision, the warning signs are accumulating. Whether the market actually declines remains uncertain, but investors would be wise to acknowledge that the easy money of the past three years may have already been made.