Prediction: The S&P 500 Will Drop 10% in 2026 | The Motley Fool

The S&P 500 ( ^GSPC +0.67%) is on track to produce another year of above-average gains for investors in 2025. After climbing 24% in 2023 and 23% in 2024, the index is up another 16% in 2025 as of this writing. And analysts are optimistic about 2026 as well. Using a bottom-up approach of aggregating the analyst price targets of each stock in the S&P 500 suggests the index could climb to 7,969 by the end of next year. Overall estimates range from 7,100 to 8,100, suggesting stocks will rise somewhere between 4% and 19% from the current level. However, investors expecting returns that will push their portfolio values steadily higher in 2026 may be in for a rude awakening. In fact, despite analyst sentiment, odds are good that the S&P 500 will fall 10% in 2026. Image source: Getty Images. Stocks don't go up in a straight line forever Anyone who's ever invested a dollar in the stock market knows stocks don't go up in a straight line. Stock prices are constantly changing every second of every hour the markets are open. That results in ups and downs in prices, and stocks can move wildly when new information comes out, like an earnings report. As a result, stocks move up and down during the normal course of a year. While the investor default is for an optimistic future (why would they invest if they weren't optimistic?), sometimes a news item rattles that confidence, and stocks sell off. It happens every year. Stocks don't hit a new all-time high every day. The median drawdown from an all-time high (or start of the year) in the S&P 500 since 1980 is 10.4%. Historically speaking, there's a 50% chance the S&P 500 drops 10% (or more) at some point in 2026. Adding to that, the average time between corrections is about once every 18 months. The last correction came in April of 2025, so it would be perfectly average if the index had another correction in late 2026. Of course, the S&P 500 often ignores averages. Just because the index has dropped 10% or more in about half of the years since 1980 doesn't mean it's likely to occur again in 2026. But a few additional market metrics suggest it's more likely than in an average year. SNPINDEX: ^GSPC Key Data Points Why stocks are poised to drop After climbing for three straight years on the back of excitement around artificial intelligence and the potential productivity gains to be had for businesses across all sorts of industries, the S&P 500 looks expensive. While some companies have seen an immediate and direct impact on their bottom lines from improvements in artificial intelligence and the growing spending of a handful of giant tech companies, many stocks have merely been caught up in the excitement. As a result, the S&P 500's forward P/E ratio sits above 22, which is around its high in 2021 (ahead of the 2022 bear market) and previously seen amid the...

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