Will the stock market crash in 2026? The options market suggests investors might have miscalculated the odds.

Investors estimate a 31% probability of a stock market crash by 2026, but the options market only prices in an 8% chance. Historically, such crashes occur roughly every 10 to 12.5 years, with the last one less than 6 years ago. The pain index is rising, and stock valuations are at all-time highs, suggesting the crash probability may be underestimated.

31% Investors Bet on a Drop, Compared to Only 8% Implied by Options Market

Viktor Haghani and James White of Elm Wealth Management serve a clientele of highly professional investors. Before their clients read a report on a potential stock market crash, they ask them to estimate the probability that the S&P 500 will decline by 30% over the next 12 months. The average answer is 31%. A long-term survey by Yale economist Robert Shiller yields a similar result.

But talking about it costs nothing. Those who actually put real money on the line through options market are pricing in only an 8% crash probability, according to Elm’s calculations. Steven Blitz, Chief U.S. Economist at TS Lombard, agrees. He believes that a historical probability of 8% to 10%, roughly once every 10 to 12.5 years, is a reasonable estimate.

This huge discrepancy reveals a key flaw in human behavior: the gap between words and actions. When asked about crash probabilities, investors tend to overestimate the risk because recent market volatility, media reports, and social media panic amplify their perception of danger. However, when it comes to actually paying for protection (like buying put options), they are unwilling to bear the cost, indicating deep down they don’t truly believe a crash will happen.

The 8% implied probability from the options market is closer to reality. Options traders are betting with real money, and their collective judgment is based on rigorous risk-reward calculations. If they truly believed the crash probability was 31%, the prices of puts would be much higher. The low pricing in the options market suggests that professional traders think the answer to “Will the stock market crash in 2026?” is more likely “No.”

Dual Warnings: Pain Index and Valuation Bubble

The last stock market crash occurred less than 6 years ago, triggered by the COVID-19 pandemic causing economic shutdowns. That doesn’t mean we can be complacent now. Blitz, while not predicting an imminent crash, points out that when the “pain index” (inflation rate plus unemployment rate) rises, crashes tend to happen more frequently, and that index is now climbing.

Three Major Signs of Rising Crash Probability

Pain Index Rising: Inflation plus unemployment are climbing, historically correlated with increased crash frequency.

Valuations at Historic Highs: Stock valuations are near all-time highs, increasing bubble burst risk.

Shorter Cycles: Crashes were frequent between 1966 and 1982, then 18 years of relative calm, suggesting a new high-risk cycle may be beginning.

For example, during 1966–1982, markets were more prone to crashes, while the following 18 years were relatively stable. Negative trends make stocks cheaper relative to the overall economy. Coupled with current valuations at near-record highs, the probability of a crash this year could be even higher. This divergence between valuations and economic fundamentals is a classic bubble indicator.

While options markets and insurers may be good at estimating long-term average probabilities of certain events, sometimes bad things happen in succession. In such cases, the “protection” prices they offer can be too cheap. This is the Fat Tail Risk problem: the actual frequency of extreme events often exceeds what a normal distribution predicts.

Current market risks include: U.S. government debt surpassing $36 trillion, lagging effects of Federal Reserve tightening, geopolitical tensions (Ukraine, Middle East, Taiwan), and policy uncertainties under Trump. These factors combined could trigger a black swan event. The answer to “Will the stock market crash in 2026?” may be closer to investors’ intuition of 31% than the options market’s 8%.

Peter Linn’s Timing Trap Warning

Most notably, it’s not just that the crash probability has slightly increased, but how those who fully read Elm’s analysis of crash frequency react. When they give a second estimate, they still believe there’s a 15% chance of a crash in the next year. Although lower than the initial 31%, it’s still well above the 8% implied by options prices. This persistent overestimation could cost them.

As star fund manager Peter Lynch said: “Investors lose far more money trying to predict a correction or time the market than they do during the correction itself.” This hits the core paradox of timing strategies. When investors become overly worried about a crash, they may sell early or hold too much cash, missing out on further gains. The opportunity cost often exceeds the actual loss during a crash.

The question “Will the stock market crash in 2026?” has no certain answer, but the strategy is clear. Don’t try to precisely predict the timing of a crash; instead, build a resilient portfolio. This includes maintaining a moderate stock allocation (not all-in), diversifying across asset classes (stocks, bonds, gold, cash), regularly rebalancing to lock in gains, and buying some protective puts (but not overdoing it).

The best approach is to lay a solid investment foundation and treat stock market crashes like natural disasters—understand their probability and accept that they will happen from time to time. Even slightly better timing can help you avoid huge losses or make big gains. But statistics show most people cannot accurately time the market; excessive worry often causes missed opportunities for long-term compound growth.

This is a $64 trillion question. The answer may not be “yes” or “no,” but “be prepared.” When investors are ready for a crash and don’t panic excessively, they can survive long-term in this uncertain market.