Could 2026 Bring a Market Correction? Here's What the Numbers Tell Us

The Valuation Question Looms Large

As we head into 2026, investors face a familiar dilemma: Is the current bull market overextended, or are we still in the early innings of a major structural shift? The answer depends heavily on which lens you use to examine the market.

The numbers paint a complex picture. Two widely-respected valuation indicators—the CAPE ratio and the Buffett Indicator—both suggest stocks are trading at stretched levels. The CAPE ratio, developed by Nobel Prize winner Robert Shiller, compares the S&P 500’s current price to its 10-year inflation-adjusted earnings. Today’s reading of roughly 40 is nearly double the historical average of 17. The last time this metric climbed above 40 was during the dot-com era, and every sustained period above 30 has historically preceded a 20%+ market decline.

Similarly, the Buffett Indicator—which divides total U.S. stock market capitalization by GDP—now sits near 225%, far exceeding the 160% threshold that signals significant overvaluation. Warren Buffett himself has responded by accumulating an enormous cash position, a classic defensive move.

But History Offers a Different Script

However, the cautionary tale told by these metrics isn’t the complete story. When you shift your focus to forward-looking valuations rather than rearview-mirror calculations, the picture changes. Despite their strong recent performance, major tech leaders don’t appear unreasonably priced on expected future earnings. Nvidia trades at 25 times forward earnings, while Alphabet, Amazon, and Microsoft all sit below 30 times while expanding revenues at impressive rates.

This matters because the earnings power of AI and data center investments remains the central question. If this infrastructure build-out represents merely another cyclical semiconductor wave, then today’s valuations could spell trouble. But if AI represents a secular (decade-plus) opportunity, then today’s megacap tech stocks might actually offer value.

The Calendar Provides a Roadmap

Beyond valuations, 2026 brings a unique factor: midterm elections. Historically, this matters. The 12 months preceding a midterm election have delivered just 0.3% average annual returns on the S&P 500 since 1950, with notable pullbacks from recent highs fairly common.

The encouraging news? The pattern reverses sharply after elections conclude. The S&P 500 has posted positive returns in every midterm election cycle since 1939, with an average 12-month post-election gain of 16.3%.

Bull Markets Run Longer Than You Think

There’s also a structural tailwind often overlooked. Bull markets since 1950 have averaged 5.5 years in duration—and importantly, every bull market lasting three years has gone on to last at least five. The current advance recently hit its three-year mark, suggesting staying power. Additionally, in the five instances since 1950 when the S&P 500 jumped 35% or more in six months (which happened earlier this year), the index was higher 12 months later, with an average return of 13.4%.

What This Means for Your Portfolio

Weighing all evidence, a crash in 2026 seems unlikely, though the year won’t necessarily be smooth. Expect a moderate decline in the first half—a correction rather than a collapse—followed by a meaningful post-election rebound that carries the market to gains for the year. Market cycles, rather than valuation metrics alone, will likely determine outcomes.

The uncertainty underscores why reliance on a disciplined approach—such as dollar-cost averaging through a broad-based fund like the Vanguard S&P 500 ETF—remains sensible. While no one can predict the market with certainty, history suggests that time in the market beats timing the market.