The S&P 500 scored yet another annual win in 2025, advancing 16%. That was after climbing more than 20% in each of the previous two years, amid excitement about artificial intelligence (AI) stocks and general optimism about the economy. AI has started to revolutionize the way businesses operate, and this is benefiting both the users and developers of this technology. For example, the users are streamlining processes and speeding up innovation, boosting earnings potential. And the developers of AI and sellers of AI services are already generating enormous revenue growth.
And now, in the early days of 2026, the bull market that started more than three years ago continues along its path.
Even in this bright market environment, however, one fact lingers: The S&P 500 at some point in the future will face a downturn as the index never climbs in one straight line forever. Will this moment, potentially a S&P 500 crash, come in 2026? History offers a strikingly clear answer.
Image source: Getty Images.
The stock market in 2025
Before diving in, however, let's take a closer look at the market's path over the past year. Though the S&P 500 advanced last year, the road was a bit rocky. The famous benchmark tumbled, led by the growth stocks that had previous pushed it higher, through March and April of last year on concerns about U.S. import tariffs. The fear was that such tariffs would weigh on the earnings of many U.S. companies -- including the biggest tech names -- as they import parts and finished goods from China and other countries.
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Key Data Points
President Donald Trump's negotiations with countries and certain exemptions for U.S. companies investing in manufacturing at home progressively eased investors' minds. And this allowed shares of growth companies to take off once again.
In fact, gains continued at such a strong pace that later in the year, some investors worried about the possibility of an AI bubble taking shape. That weighed on stocks in November, but they've since bounced back as companies spoke of strong AI demand and reported ongoing earnings growth. In recent days, we entered the latest earnings season, and investors will have their eyes on the messages from tech giants regarding the AI story.
Now, let's consider our question: After three years of double-digit gains, will the S&P 500 crash in 2026? To address this, it's a great idea to look at the one thing that's been perturbing investors in recent times, and that's valuation. As we can see through the S&P 500 Shiller CAPE ratio, an inflation-adjusted measure of stock price in relation to earnings per share, stocks are trading at a level they've only reached once before in the index's history.
S&P 500 Shiller CAPE Ratio data by YCharts
A look into the past
Let's see what's happened in the past when stocks have attained a peak in valuation. These valuations have gone on to fall -- and the S&P 500 also has dropped, as you can see in the chart below.
S&P 500 Shiller CAPE Ratio data by YCharts
Declines aren't always uniform, however. In some cases, such as after the dot-com boom, they've lasted for an extended period, and at other times, the drop has been brief.
So, history tells us that, considering today's valuation levels, the market could be ripe for a change in direction: And that means we could see declines in 2026. But, this doesn't necessarily mean the market will crash or that the downturn will last for the entire year or longer. We might see a dip in valuations and in the S&P 500, and the benchmark still may finish the year with a win.
The length and depth of a potential pullback may depend on the strength of AI demand and spending, as well as earnings growth in the quarters to come. Meanwhile, any geopolitical event may also impact the market's direction.
And even in the worst scenario, if the market crashes in 2026, the good news is that the S&P 500 always has gone on to recover and advance. This means that the best strategy for investors is to remain calm and hold onto quality stocks for the long term.
