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

Core Insights - The S&P 500 advanced 16% in 2025, marking the third consecutive year of double-digit returns, but the winning streak may end in 2026 due to midterm election year challenges and elevated valuations [2] - Federal Reserve Chairman Jerome Powell and other officials have expressed concerns about the stock market's high valuations, with the S&P 500 currently trading at 22.2 times forward earnings, a level historically associated with significant declines [3][7] Market Performance During Midterm Elections - Historically, the S&P 500 has performed poorly during midterm election years, averaging a return of only 1% (excluding dividends) compared to an annual average of 9% since 1957 [5] - The index has declined by an average of 7% during midterm elections when a new president is in office, primarily due to policy uncertainty as the ruling party typically loses seats in Congress [5][6] Post-Midterm Election Recovery - Despite poor performance during midterm elections, the six months following these elections (November to April) have historically been strong, with the S&P 500 returning an average of 14% during this period [6]