The S&P 500 (SNPINDEX: ^GSPC) has added 1.5% year to date, and the benchmark is currently half a percentage point off its all-time high. However, several Federal Reserve officials (including Chairman Jerome Powell) have warned investors that stock prices are high by historical standards.
Wall Street anticipates double-digit gains in the S&P 500 in the remaining months of 2026, but a stock market decline (or even a crash) is very possible. Here’s what investors should know.
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Image source: Official Federal Reserve photo.
While Federal Reserve officials monitor the stock market, their monetary policy decisions do not target specific prices for any financial asset. However, Fed Chairman Jerome Powell warned in September: “By many measures … stock prices are quite appreciated.”
Other policy makers have expressed similar concerns. Minutes from the FOMC’s October meeting stated: “Some participants commented on the stretched valuations of assets in the financial markets, with several of these participants pointing to the possibility of a disorderly decline in stock prices.”
Additionally, the latest version of the Federal Reserve’s semiannual financial stability report was released in November. It warned that the S&P 500’s forward price-to-earnings (P/E) ratio is “close to the upper end of its historical range.”
Today, the S&P 500 has a forward P/E ratio of 22.1, a premium to the 10-year average of 18.8, according to data FactSet Research. Comparatively, the index had a forward P/E ratio of 22.5 when Powell noted that stock prices were “fairly valued” in September.
Outside of the current bull market, the S&P 500 has only supported a forward P/E multiple above 22 in two periods in the last four decades: the dot-com bubble and the COVID-19 pandemic. The index eventually fell into a bear market both times.
The table shows the best, worst, and average returns of the S&P 500 over various time periods after recording a forward P/E multiple above 22.
Time period
The best return of the S&P 500
The S&P 500’s worst performance
The average return of the S&P 500
One year
39%
(24%)
7%
Two years
34%
(42%)
(6%)
Data source: Federal Reserve. Data covers January 1989 to January 2026.
As shown, the S&P 500 has returned an average of 7% over the 12-month period, following a forward P/E multiple of over 22. Comparatively, the index has returned an average of 10% over each 12-month period.
More worryingly, the S&P 500 has fallen an average of 6% over the two-year period, following a forward P/E multiple above 22. Comparatively, the index has returned an average of 21% over each two-year period.
What does this mean for investors? A forward P/E ratio above 22 does not mean a market crash is imminent, although it is a possibility because the S&P 500 is prone to declines under such conditions. However, historical data suggests that the S&P 500 will rise about 7% through January 2027 and fall about 6% through January 2028.
Wall Street expects S&P 500 companies to report accelerating revenue and earnings growth in 2026. Specifically, revenue is expected to grow 7.1% (from 6.6% in 2025) and earnings are expected to grow 15.2% (from 13.3% in 2025), according to LSEG.
As a result, most analysts have a bullish outlook for the US stock market in 2026. The table details where 19 investment banks and Wall Street research organizations think the S&P 500 will end the year. It also shows the implied upside from the current level of 6,950.
The firm on Wall Street
S&P 500 Price Target (2026)
On top
Oppenheimer
8,100
17%
Deutsche Bank
8,000
15%
Morgan Stanley
7,800
12%
Seaport research
7,800
12%
Evercore
7,750
12%
RBC Capital
7,750
12%
City Group
7,700
11%
Fundstrat
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%
cf.
7,400
6%
Bank of America
7,100
2%
Median
7,600
10%
Sources: BMO Capital Markets, Reuters, Yahoo Finance.
As shown, the median forecast of the 19 analysts says the S&P 500 will end the year at 7,600. This is a 10% increase from the current level of 6,950.
However, Wall Street is notoriously bad at predicting how the S&P 500 will perform in a given year. In fact, the median estimate over the past four years has been off by an average of 16 percentage points. In any case, investors should be wary of Wall Street’s outlook.
With valuations high by historical standards, the stock could fall sharply if financial results fail to meet high expectations.
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Stock market crash in 2026? Fed Chairman Jerome Powell has an urgent warning for investors. was originally published by The Motley Fool
