Is a Stock Market Crash Coming in 2026? Here's What Decades of History Suggest.

The S&P 500 (^GSPC +0.31%) has risen by 10.8% this year, but recent weeks have seen it decline. With the possible end of a four-year run of double-digit annual gains, concerns about a market crash in 2026 have emerged. Influencing factors include AI spend, high inflation, steady interest rates, and Tuesday's U.S. midterm election results.

Examining a century of data provides insights for today's investors. The cyclically adjusted price-to-earnings (CAPE) ratio, adjusted for inflation over 10 years, averages 17.8. This ratio peaked above 40 before the 1929 crash and again at 44 before the 2000 dot-com crash. However, last year, the 40 mark was not reached until late May.

Valuations and company debt are similar to the dot-com era, with well-established firms like Amazon and Alphabet now experiencing free cash flow negativity due to AI spending. However, these giants already face challenges with high inflation and interest rates. The 1973 oil crisis, marked by an oil embargo and rising interest rates, saw a 51.9% stock market drop between 1973 and 1974.

While today's inflation and interest rates may not reach the extreme levels of the 1970s, a market crash could still be severe. The recent COVID-19 crash resulted in a 34% loss in the S&P 500 within a month, followed by a recovery by mid-August. Proper preparation can help portfolios withstand crashes and rebound in better times.