When Will the Stock Market Face a Pullback? The Data Suggests 2026 Could Be Telling

Multiple Warning Signals Flashing on Valuations

The stock market’s fourth consecutive year of gains has sparked intense debate among market participants about whether a stock market crash is imminent. Three key indicators are sending mixed signals, and understanding them is crucial for anyone trying to time the market—or just understand what could happen next.

Start with the CAPE ratio, developed by Nobel laureate Robert Shiller. This metric smooths out business earnings cycles by comparing the S&P 500’s current value against its 10-year inflation-adjusted average earnings. The historical norm sits around 17, but we’re currently hovering near 40—a level that’s triggered major red flags. Whenever this ratio has sustained levels above 30, markets have typically experienced 20%+ declines. The last time it approached 40 was in 2000, right before the dot-com collapse.

Then there’s the Buffett Indicator, Warren Buffett’s go-to tool for spotting market excesses. It divides total U.S. stock market capitalization by GDP. Today’s reading of approximately 225% screams “overvalued”—anything over 160% already signals significant stretching. The last comparable reading was around 200% in 2000. This is precisely why Buffett has been aggressively accumulating cash over the past two years.

Why History Could Save This Bull Run

But here’s where the narrative gets interesting: bull markets have surprising staying power. The current bull market just passed its third anniversary, which is historically positive. Since 1950, bull markets have averaged five and a half years in duration. More tellingly, every bull market that survived three years went on to last at least five years—setting the stage for continued upside.

The S&P 500 also shows remarkable resilience after sharp rallies. In the five instances since 1950 when the index climbed more than 35% in six months (which happened earlier this year), the market was positive 12 months later with an average return of 13.4%. This doesn’t sound like a stock market crash is coming imminently.

The 2026 Midterm Election Wildcard

Here’s a timing factor that deserves attention: 2026 is a midterm election year. Historically, the 12 months leading up to midterms have been messy for the S&P 500, averaging just 0.3% annual returns since 1950, with painful drawdowns from peak to trough. Investors typically get nervous about policy uncertainty.

The silver lining? Elections are over. The S&P 500 has never posted negative returns in the 12 months following a midterm election since 1939, and the average post-election return is an impressive 16.3%. This suggests that any 2026 turbulence might set up a strong 2027.

The AI Debate That Actually Matters

The real question hanging over this market isn’t valuation—it’s the nature of the AI boom. Are we in a cyclical semiconductor cycle that will fizzle out, or are we in the early innings of a multi-decade infrastructure build-out?

If AI earnings prove cyclical, then yes, Nvidia (trading at 25x forward earnings), Alphabet, Amazon, and Microsoft (all below 30x forward multiples) might be overpriced, validating CAPE ratio and Buffett Indicator concerns. But if AI infrastructure spending is a secular, decade-long transformation, these mega-cap leaders remain undervalued, and traditional valuation metrics become obsolete.

That question likely won’t be settled in 2026.

The Probable Scenario

Weighing the technical data against valuation concerns, cyclical factors probably matter more than absolute valuations next year. Expect a moderate pullback in the first half—likely driven by midterm election anxiety and profit-taking—but not a crash. This could then give way to a post-election rally and positive full-year returns.

Of course, market prediction is a fool’s game. The safer approach is consistent dollar-cost averaging into broad diversified exposure—letting time and compounding do the heavy lifting rather than trying to dodge short-term noise.