The S&P 500 (^GSPC 1.08%) posted double-digit gains in each of the last three years. The benchmark index has already added 1.4% year to date, and many Wall Street analysts expect it to end 2026 with another double-digit return.
However, quite a few signals are flashing a warning right now that investors would do well to pay attention to.
The benchmark index is, by historical standards, trading at a high premium. Its forward price-to-earnings (P/E) is about 22, a much pricier figure than its 30-year average of about 17, according to research compiled by investment firm J.P. Morgan. The last time the forward P/E was this high, it was just before the tech sell-off in 2021. Before that, it broke the 20-mark plane in the late '90s as dot-com fever was about to crash.
Image source: Getty Images.
Perhaps more troubling is a second signal from the market's CAPE ratio, which estimates an index's long-term growth by using a decade of inflation-adjusted earnings. It's had a 30-year average of about 28.5. Today, that valuation metric is close to 40 (about 39.85), which makes it now only the second time in 153 years of data that the market's CAPE has been this high.
The last time the CAPE exceeded 40, it was followed by the market crash of 2000.
Data by YCharts.
Do these metrics mean the market will crash in 2026? Not necessarily. What they do suggest, however, is that the S&P 500 has risen much higher than the ground below it can stabilize.
Put differently, it wouldn't be surprising if the market crashed in 2026. It would be historically resonant if it did.
The market has proven its resilience, and it will likely continue its tenacity over the long run. But these two signals are flashing a warning that investors should pay attention to. A rapid sell-off of one's holdings is probably not the best answer. But a careful selection of investments that could weather a potential storm might be wise at this point.
