Trevor Jennewine, The Motley Fool
5 min read
The S&P 500 (SNPINDEX: ^GSPC) has added 1.5% year to date, and the benchmark index currently sits within half a percentage point of its all-time high. However, several Federal Reserve officials (including Chair Jerome Powell) have warned investors that stock prices are elevated by historical standards.
Wall Street anticipates double-digit gains in the S&P 500 in the remaining months of 2026, but a stock market drawdown (or even a crash) is well within the realm of possibility. Here’s what investors should know.
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While Federal Reserve officials monitor the stock market, their monetary policy decisions do not target specific prices for any financial asset. Nevertheless, Fed Chairman Jerome Powell warned in September, “By many measures… equity prices are fairly highly valued.”
Other policymakers have expressed similar concerns. Minutes from the FOMC meeting in October stated, “Some participants commented on stretched asset valuations in financial markets, with several of these participants highlighting the possibility of a disorderly fall 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 was “close to 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. Comparatively, the index had a forward P/E ratio of 22.5 when Powell remarked about equity prices being “fairly highly valued” in September.
Apart from the current bull market, the S&P 500 has only sustained a forward P/E multiple above 22 during two periods in the last four decades: the dot-com bubble and the COVID-19 pandemic. The index eventually fell into a bear market both times.
The table shows the S&P 500’s best, worst, and average returns over different time periods after recording a forward P/E multiple above 22.
|
Time Period |
S&P 500’s Best Return |
S&P 500’s Worst Return |
S&P 500’s Average Return |
|---|---|---|---|
|
One year |
39% |
(24%) |
7% |
|
Two years |
34% |
(42%) |
(6%) |
Data source: Federal Reserve. Data covers January 1989 through January 2026.
