Will the Stock Market Crash in 2026? What History Says.

With the current bull market having entered its fourth year, there is growing chatter of an artificial intelligence (AI) bubble and a potential market crash. Let's look at some historical indicators to help us determine the likelihood of a market crash in 2026.

The Shiller P/E (CAPE) ratio

This metric was created by Nobel laureate Robert Shiller as a way to smooth out the cyclical earnings of businesses. It takes the current value of the S&P 500 index (SNPINDEX: ^GSPC) and divides it by the index's 10-year inflation-adjusted earnings. The ratio's long-term average is around 17, while it currently sits at roughly 40. Every time the ratio has been above 30 for an extended period, the market has seen a 20% or more decline. The only other time the ratio was above 40 was before dot-com bubble burst.

The Buffett Indicator

One of Warren Buffett's favorite metrics for determining whether the market is overvalued is to divide the total U.S. stock market capitalization by the country's gross domestic product (GDP). The metric is currently sitting near a high of around 225%. Any ratio over 160% is considered significantly overvalued. The last time it approached 200% was in 2000 before the tech market crash.

It is no wonder that Buffett has built a huge cash position over the past couple of years.

Midterm elections

2026 will be a midterm election year, when about a third of Senate seats are up for grabs, in addition to every position in the House of Representatives. This tends to bring increased volatility to the stock market leading up to the elections. In the 12 months leading up to the elections, the S&P 500 has only seen a 0.3% average annual return since 1950. Meanwhile, stocks often see a large pullback from peak to trough leading up to the elections.

The good news is that historically, once the midterm elections are over, stocks tend to rally. The S&P 500 has not had a negative return following a midterm election since 1939, and the index's average 12-month return after the election since 1950 is 16.3%.

The fourth year of a bull market

The bull market recently had its three-year anniversary, which is typically a good sign for stocks. Bull markets are generally long-lived, having averaged five and a half years since 1950. Meanwhile, the Carson Group has recently noted that every bull market that has lasted three years has managed to last at least five years over the past 50 years.

In addition, in the five instances since 1950 when the S&P 500 has climbed more than 35% in a six-month period, which occurred earlier this year, the market has been up 12 months later. The average return during these periods was 13.4%.

Image source: Getty Images.

The verdict

While the CAPE ratio and Buffett Indicator suggest a high market valuation, it is worth noting that both of these metrics examine past earnings, rather than future earnings potential. Based on current 2026 analyst estimates, many of the top tech stocks leading the market higher are not pricey on a forward price-to-earnings (P/E) ratio. Nvidia trades at just a 25 times multiple, while Alphabet, Amazon, and Microsoft all trade below 30 times while growing their revenue quickly.

The biggest question is whether much of the earnings from AI and data center infrastructure are cyclical or secular in nature. If this is just a cyclical semiconductor cycle, then it can be argued that stocks like Nvidia are overvalued and the worries about the CAPE ratio and Buffett Indicator are warranted. However, if the AI infrastructure build-out is a decade-plus secular trend, megacap AI stocks look undervalued, and these metrics look outdated. This argument, however, is unlikely to be decided in 2026.

I think cycles will more likely play a bigger role in stock prices next year than valuations. Therefore, I'd expect a moderate first-half pullback, but not a crash, followed by a nice post-election rally and a positive year overall.

Of course, no one can predict with certainty how the market will perform, which is why I always recommend investors use a dollar-cost averaging strategy with a core exchange-traded fund (ETF), like the Vanguard S&P 500 ETF (NYSEMKT: VOO).

Geoffrey Seiler has positions in Alphabet, Amazon, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.