Is the Stock Market Headed for a Crash? Here's What the Fed's Unusual Moves Tell Us

The U.S. stock market has been on fire in 2025, with the S&P 500 gaining roughly 16% year-to-date—nearly twice its historical average. Yet beneath the surface, warning signs are flashing red. The Federal Reserve’s recent policy moves have left investors wondering whether the stock market is about to experience a painful correction in 2026.

When Central Bankers Can’t Agree, Markets Should Worry

Something unusual happened at the Federal Reserve’s December meeting that hasn’t occurred in decades. When officials voted on interest rates, they were deeply divided. While the rate cut of 25 basis points passed, three policymakers dissented—and they disagreed in opposite directions.

Two officials wanted to keep rates unchanged, arguing that cutting rates further would fuel inflation. Another wanted an even deeper cut of 50 basis points, concerned about economic slowdown. This kind of split is rare. According to Apollo Global Management’s chief economist, the last time three officials disagreed at a single meeting was June 1988—more than 35 years ago.

What’s causing this breakdown? President Trump’s sweeping tariffs. These trade policies have pushed import taxes to their highest levels since the 1930s, creating an economic puzzle that central bankers can’t solve with traditional tools. Higher tariffs drive inflation up, but raising rates risks pushing unemployment higher. Lower rates ease employment but worsen price pressures. The Fed is stuck between a rock and a hard place.

This discord is what some call a “silent warning.” When the world’s most powerful financial institution can’t reach consensus on policy direction, it signals deep uncertainty about where the economy is heading. Historically, the stock market dislikes ambiguity more than it dislikes pain—and this situation screams ambiguity.

The Valuation Picture: History Suggests Trouble Ahead

Here’s the uncomfortable truth: stocks are priced at levels that have preceded major declines in the past. The S&P 500 trades at a cyclically adjusted price-to-earnings ratio of 39.2—a metric that adjusts earnings for the business cycle to give a clearer picture of true value.

This valuation level is significant because it’s rarely seen. In the 68 years this metric has been tracked, the stock market has only posted such high valuations around 3% of the time. The most recent comparable period? Late 2000, during the dot-com bubble that preceded a 49% crash.

What happens to stocks after they reach such elevated valuations? History offers a sobering lesson. When the S&P 500 has traded at these price-to-earnings levels, the average return over the following year has been a loss of 4%. Some years, markets have soared ahead by 16%. Other years, they’ve plummeted as much as 28%. But the median outcome is downward.

Put simply: the stock market is expensive right now, and expensive things tend to get cheaper.

Why 2026 Looks Different From 2025

Last year, the stock market surged despite policy uncertainty. But the conditions are shifting. The combination of elevated valuations, central bank confusion, and trade-policy headwinds creates a backdrop that looks unfavorable for equities.

The benchmark S&P 500 may continue higher, but investors should mentally prepare for the possibility of a meaningful pullback. The 16% gain in 2025 is a long way up, and long climbs often end with sharp descents.

For those holding stocks, the message is clear: don’t assume the momentum will continue. The foundation beneath the market—Fed policy clarity, reasonable valuations, and economic certainty—is cracking. While we can’t predict the exact timing or magnitude of any potential decline in the stock market, the data suggests 2026 will test investor patience in ways 2025 did not.