the S&P 500 (SNPINDEX: ^GSPC) it’s up 1.5% year to date, and the benchmark index is currently within half a percentage point of its all-time high. However, several Federal Reserve officials (including President Jerome Powell) have warned investors that share prices are elevated 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 well within the realm of possibility. 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…equity prices are quite appreciated.”
Other policy makers have expressed similar concerns. Minutes from the FOMC’s October meeting stated, “Some participants commented on stretched asset valuations in financial markets, with several of these participants highlighting the possibility of a disorderly decline in equity prices.”
In addition, the latest version of the Federal Reserve’s semiannual financial stability report was published in November. It warned that the S&P 500’s forward price-to-earnings (P/E) ratio was “near 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 FactSet Research. Comparatively, the index had a forward P/E ratio of 22.5 when Powell remarked on equity prices being “quite highly valued” in September.
Aside from the current bull market, the S&P 500 has only sustained a forward P/E multiple above 22 during two periods in the past 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 P/E multiple above 22.
Time Period
Best S&P 500 Return
Worst S&P 500 Return
S&P 500 Average Return
A year
39%
(24%)
7%
Two years
34%
(42%)
(6%)
Data source: Federal Reserve. The data covers January 1989 to January 2026.
As shown, the S & P 500 returned an average of 7% during the 12-month period following a forward P/E multiple above 22. Comparatively, the index returned an average of 10% over each 12-month period.
More concern, the S & P 500 has declined by an average of 6% during the two-year period after a forward P / E multiple 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 does not mean that a market crash is imminent, although it is a possibility because the S&P 500 is predisposed to drawdowns under such conditions. However, historical data suggests that the S&P 500 will increase about 7% through January 2027 and decline about 6% through January 2028.
Wall Street expects S&P 500 companies to report an acceleration in revenue and earnings growth in 2026. Specifically, revenue is expected to increase 7.1% (up from 6.6% in 2025) and earnings are expected to increase 15.2% (up from 13.3% in 2025), according to LSEG.
Consequently, most analysts have an optimistic outlook for the US stock market in 2026. The chart details where 19 Wall Street investment banks and research organizations think the S&P 500 will end the year. It also shows the implied upside from the current level of 6,950.
Wall Street Firm
S&P 500 price target (2026)
Of his head
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%
Citigroup
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%
CFR
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 among 19 analysts says that the S&P 500 will end the year at 7,600. This implies a 10% upside from its current level of 6,950.
However, Wall Street is notoriously bad at predicting how the S&P 500 will perform in any given year. In fact, the median estimate over the past four years has been off by an average of 16 percentage points. If anything, investors should be wary of Wall Street’s outlook.
With valuations elevated by historical standards, stocks 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
