How Likely Is It That the Stock Market Crashes in 2026? Here's What History Tells Us.

Although the first few months of 2025 started off rocky for the stock market amid the Trump administration's tariff plan, the market made an impressive turnaround and finished the year strong. The S&P 500 -- which is often used to gauge the stock market's performance -- finished the year up just over 16%.

The S&P 500's 2025 performance marked only the eighth time since 1926 that the index has had three consecutive years of gains of at least double digits (23% in 2024 and 24% in 2023).

With such an impressive streak, many investors are wondering if it's too good to be true and whether an inevitable crash is coming, given that the S&P 500 is historically expensive. Unfortunately, nobody can predict how the stock market will perform, but let's take a look at what history tells us.

Image source: Getty Images.

What has year four historically brought after three consecutive double-digit years?

Below is how the S&P 500 has performed in the year following three consecutive years of double-digit gains:

Data source: SlickCharts.com. Percentages are rounded to the nearest whole number and represent total returns.

One major thing to note is that there's no real correlation in the S&P 500's fourth-year performance. The double-digit streak continued in three years (1945, 1952, and 1998), it produced negative returns in three years (1929, 1966, and 2022), and it was essentially flat in 2015.

If anything, my personal takeaway is that the S&P 500 rarely remains calm in the fourth year. It either stays hot and keeps the party going, or it cools down with a correction. The relatively flat performance in 2015 seems to be the exception.

The S&P 500 is historically expensive

The S&P 500's run over the past few years has been much appreciated by investors, but it has also put the index in rare valuation territory. One metric many focus on to come to this conclusion is the Shiller price-to-earnings (P/E) index, sometimes referred to as the CAPE ratio.

The Shiller P/E ratio looks at the S&P 500's earnings over the past 10 years, adjusting them for inflation to prevent outlier events from skewing the numbers. To start the year, the Shiller P/E ratio is just above 40.5, which is historically high. For perspective, it's the second-highest ratio in history, with the only time it exceeded it being at the peak of the dot-com bubble (44.19).

Unfortunately, those who were invested in the stock market during the dot-com bubble know how that eventually ended: The S&P 500 lost nearly half of its value.

Should investors prepare for a crash in 2026?

Despite any historical correlations, one thing always remains true in the stock market: Past results don't predict future performance. You can use historical events to get a sense of trends or what could happen, but in the end, there's no way to predict how the market will perform. If there were, very few people would lose money, and we'd have a lot more millionaires.

If you're concerned about a potential market crash in 2026, there are two things I encourage you to do. First, make sure your portfolio is diversified. The S&P 500 is very concentrated in tech stocks (especially the "Magnificent Seven" companies) because of the recent artificial intelligence boom. Making sure you're not too heavily reliant on a handful of companies can save you from a sector-specific crash and help smooth things out.

The second thing is considering dollar-cost averaging, where you set a specific amount to invest and put yourself on an investing schedule. This keeps your investing consistent and prevents you from investing a lump sum before a major market decline.

Regardless of how the market performs in 2026, it has consistently shown an upward trend over the long run. Instead of focusing too much on short-term movements, stay consistent and trust the long-term trend.

Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.