The S&P 500 (SNPINDEX: ^GSPC) It has added 1.5% year to date, and the benchmark index currently sits within half a percentage point of its all-time high. However, many Federal Reserve officials (including Chairman Jerome Powell) have warned investors that stock prices are high by historical standards.
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Wall Street predicts double-digit gains in the S&P 500 for 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 need to 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 overvalued.”
Other policymakers have expressed similar concerns. Minutes from the FOMC meeting in October said, “While some participants commented on the extended asset valuations in financial markets, many of these participants highlighted the possibility of a disorderly decline in equity prices.”
Additionally, 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 “is 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. By comparison, the index had a forward P/E ratio of 22.5 when Powell noted that equity prices were “reasonably overvalued” in September.
Aside from the current bull market, the S&P 500 has only maintained a forward P/E multiple above 22 during two periods over the past four decades: the dot-com bubble and the COVID-19 pandemic. Both times the index eventually fell into a bear market.
The table shows the S&P 500’s best, worst, and average returns over various time periods after recording forward P/E multiples above 22.
time period
Best returns of the S&P 500
The worst return of the S&P 500
Average return of the S&P 500
a year
39%
(24%)
7%
two years
34%
(42%)
(6%)
Data source: Federal Reserve. The data covers from January 1989 to January 2026.
As shown, the S&P 500 has returned an average of 7% over a 12-month period following a forward P/E multiple of 22. By comparison, the index has returned an average of 10% over each 12-month period.
More concerning, the S&P 500 has averaged a decline of 6% over a two-year period after a forward P/E multiple above 22. By comparison, the index has 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 a market crash is imminent, although it is likely because the S&P 500 is likely to experience a drawdown under such circumstances. However, historical data suggests that the S&P 500 will add about 7% through January 2027 and decline about 6% through January 2028.
Wall Street expects S&P 500 companies to accelerate revenue and earnings growth in 2026. Specifically, revenue is expected to grow by 7.1% (up from 6.6% in 2025) and earnings by 15.2% (up from 13.3% in 2025). LSEG.
As a result, most analysts have an optimistic outlook for the US stock market in 2026. The table details where 19 Wall Street investment banks and research firms think the S&P 500 will end the year. It also shows an implied upside from the current level of 6,950.
Wall Street Firm
S&P 500 Target Price (2026)
vice versa
Oppenheimer
8,100
17%
Deutsche Bank
8,000
15%
Morgan Stanley
7,800
12%
Port investigation
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%
JP Morgan 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%
the middle
7,600
10%
Sources: BMO Capital Markets, Reuters, Yahoo Finance.
As shown, the average forecast among 19 analysts is that the S&P 500 will end the year at 7,600. This represents a 10% upside from the 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, over the last four years the average estimate was wrong by an average of 16 percentage points. If anything, investors should be wary of Wall Street’s outlook.
With high valuations by historical standards, stocks can fall sharply if financial results fail to meet lofty expectations.
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Stock market crash in 2026? Fed Chairman Jerome Powell has an urgent warning for investors. Originally published by Motley Fool
