Stock Market Crash in 2026? Fed Chair Jerome Powell Has an Urgent Warning for Investors.
S&P 500 (SNPINDEX: ^GSPC) It is up 1.5% year to date, and the benchmark index is now within half a point of its all-time high. But several Federal Reserve officials (including Chairman Jerome Powell) have warned investors that stock prices are rising by historical standards.
Wall Street expects the S&P 500 to post double-digit gains over the remaining months of 2026, but a decline (or even a crash) in the stock market is very much on the cards. Here’s what investors need to know.
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Image source: Official Federal Reserve Photo.
During Federal Reserve Because authorities monitor the stock market, monetary policy decisions do not target specific prices for any financial asset. However, Fed Chairman Jerome Powell warned in September: “By most measures… stock prices are extremely overvalued.”
Other policymakers have expressed similar concerns. minutes later FOMC “Some participants commented that asset valuations in financial markets were stretched, and many of these participants highlighted the possibility of a disorderly decline in stock prices,” the October meeting said.
Additionally, the final version of the Federal Reserve’s semi-annual financial stability report was released in November. He warned that the S&P 500’s forward price-to-earnings (P/E) ratio is “near the upper end of its historical range.”
Today, the S&P 500’s forward price-to-earnings ratio is 22.1; this is a premium over the 10-year average of 18.8. FactSet Research. Comparatively, the index’s forward P/E ratio was 22.5 when Powell noted in September that stock prices were “fairly overvalued.”
Outside of the current bull market, the S&P 500 has only maintained a forward price/earnings multiple above 22 during two periods over the last four decades: the dot-com bubble and the COVID-19 pandemic. The index eventually fell into a bear market both times.
The chart shows the best, worst and average returns of the S&P 500 over different time periods after recording a forward price/earnings multiple of over 22.
Time Range
S&P 500’s Best Return
S&P 500’s Worst Return
Average Return of S&P 500
one year
39%
(24%)
7%
two years
34%
(42%)
(6%)
Data source: Federal Reserve. The data covers the period between January 1989 and January 2026.
As shown, the S&P 500 returned an average of 7% over the 12-month period, trailing a forward price/earnings multiple of over 22. Comparatively, the index returned an average of 10% each 12-month period.
More worryingly, the S&P 500’s forward price/earnings multiple has fallen an average of 6% over a two-year period after being above 22. Comparatively, the index returned an average of 21% over each two-year period.
What does this mean for investors? A forward P/E ratio above 22 doesn’t mean a market crash is imminent, but it is a possibility because the S&P 500 is prone to declines under such conditions. But historical data suggests the S&P 500 will rise about 7% by January 2027 and fall about 6% by January 2028.
Wall Street expects S&P 500 companies to report an acceleration in revenue and earnings growth in 2026. Specifically, revenues are expected to increase by 7.1% (up from 6.6% in 2025) and earnings are expected to increase by 15.2% (up from 13.3% in 2025). LSEG.
As a result, most analysts have an optimistic outlook for the US stock market in 2026. The chart details where 19 Wall Street investment banks and research firms think the S&P 500 will finish the year. It also shows the implied upside from the current level of 6,950.
Wall Street Firm
S&P 500 Target Price (2026)
Positive
Oppenheimer
8,100
17%
German Bank
8,000
15%
Morgan Stanley
7,800
12%
Port Research
7,800
12%
evercore
7,750
12%
RBC Capital
7,750
12%
citigroup
7,700
11%
fund layer
7,700
11%
Yardeni Research
7,700
11%
Goldman Sachs
7,600
9%
HSBC
7,500
8%
Jefferies Financial Group
7,500
8%
JPMorgan Chase
7,500
8%
UBS
7,500
8%
Wells Fargo
7,500
8%
Barclays
7,400
6%
BMO Capital
7,400
6%
CFRA
7,400
6%
Bank of America
7,100
%2
Median
7,600
10%
Sources: BMO Capital Markets, Reuters, Yahoo Finance.
As shown, the average forecast of 19 analysts says the S&P 500 will finish the year at 7,600. This represents a 10% increase from the current level of 6,950.
But Wall Street is known to be pretty bad at predicting how the S&P 500 will perform in any given year. In fact, the average forecast over the last four years was off by an average of 16 percentage points. Investors should be wary of Wall Street’s perspective.
Given that valuations have risen by historical standards, stocks could fall sharply if financial results fail to meet lofty expectations.
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