Is the Stock Market Going to Crash in 2026? 2 Historically Flawless Indicators Paint a Clear Picture. | The Motley Fool

Investors are all smiles with less than a week to go before 2025 comes to a close -- and with good reason. As of the closing bell on Dec. 19, the iconic Dow Jones Industrial Average ( ^DJI 0.04%), benchmark S&P 500 ( ^GSPC 0.03%), and growth stock-dependent Nasdaq Composite ( ^IXIC 0.09%) have risen by 14%, 16%, and 20%, respectively, year-to-date. Catalysts have been aplenty on Wall Street, with next-big-thing trends, such as the rise of artificial intelligence and the emergence of quantum computing, leading the way. The expectation of additional rate-cutting from the Federal Reserve has provided more fuel for the bull market's fire. You could almost say things have been too good to be true for the stock market -- and that's usually bad news for investors. Image source: Getty Images. According to two historically flawless indicators, there's a heightened probability of a stock market crash in the new year. These valuation tools have a 100% success rate of foreshadowing downside in stocks Before digging in, let me clarify that no single data point, ratio, or correlated event can guarantee the short-term directional movement of any specific stock or major market index. Nonetheless, some of these correlations have an excellent, or even flawless, track record of forecasting future directional movements on Wall Street. The first valuation tool that has an immaculate track record of forecasting the future (with one limitation that I'll get to in a moment) is the S&P 500's Shiller Price-to-Earnings (P/E) Ratio, which is also referred to as the cyclically adjusted P/E Ratio, or CAPE Ratio . When most investors evaluate a stock, they turn to the time-tested P/E ratio . The P/E ratio is arrived at by dividing a company's share price by its trailing 12-month earnings per share (EPS). However, the P/E ratio can easily get tripped up by recessions. Meanwhile, the Shiller P/E is based on average inflation-adjusted EPS over the previous 10 years. Recessions are unable to meaningfully skew the Shiller P/E multiple. S&P 500 Shiller CAPE Ratio data by YCharts . When back-tested to January 1871, the Shiller P/E has averaged a multiple of roughly 17.3. But as of the closing bell on Dec. 19, the Shiller P/E clocked in at a multiple of 40.15. This is the second priciest stock market in history , dating back 155 years! Over these 155 years, the S&P 500's Shiller P/E has topped 30 on six occasions, including the present. Following the previous five occurrences, the Dow Jones Industrial Average, S&P 500, and/or Nasdaq Composite went on to lose 20% to 89% of their respective value . Although the Shiller P/E Ratio doesn't help determine when the music will stop (this is its aforementioned limitation), it has flawlessly foreshadowed some sizable bear markets and stock market crashes. But this isn't the only measure of value that's received a perfect mark. The market-cap-to-GDP ratio also has an immaculate track record of portending trouble for Wall Street . In a 2001 interview with Fortune...

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