The S&P 500 index has continued to show resilience and strength in recent years, with a notable increase of 16% in 2025. This follows two prior years where the index surpassed 20% growth annually, largely driven by investor enthusiasm regarding artificial intelligence (AI) and a broadly optimistic economic outlook. The infusion of AI technology has transformed business operations by enhancing efficiency for end users and generating significant revenue growth for developers and service providers of AI platforms.
As we move into the early months of 2026, the bull market that began over three years ago shows no signs of immediate exhaustion. Yet, despite the prevailing positive sentiment, a fundamental reality persists in equity markets: indices like the S&P 500 do not ascend indefinitely without interruption. Therefore, examining the likelihood of a market downturn, specifically the possibility of a crash occurring within this year, merits careful consideration.
Reviewing Market Developments in 2025
Looking back, the path for the S&P 500 last year was far from smooth, despite ending the year with gains. Early 2025 witnessed a significant decline in technology and growth-oriented stocks, which had previously contributed heavily to the market’s rise. This selloff was principally due to concerns about U.S. import tariffs and the potential impact on corporate earnings for companies relying on imports from China and other countries.
Investor anxiety eased in part because of negotiations led by the U.S. administration, which resulted in certain exemptions for companies investing in domestic manufacturing. These developments reassured the market, leading to renewed strength in growth stock valuations and pushing the benchmark higher.
However, late in the year, some investors started expressing worries about the emergence of a bubble tied to AI stocks. This concern caused downturns in November, although confidence rebounded as companies continued to demonstrate strong demand for AI technologies and reported robust earnings growth. The onset of the 2026 earnings season has further focused attention on major technology firms and the sustained momentum of AI-related developments.
Understanding Valuation Concerns and Historical Patterns
After an extended period of robust returns, a commonly discussed factor is the valuation level of the market. The S&P 500’s Shiller cyclically adjusted price-to-earnings (CAPE) ratio adjusts for inflation and compares stock prices to earnings per share across economic cycles. Current readings show valuations at a level historically matched only once before.
Looking historically, periods when valuations peaked at comparable levels were often followed by a decline in those valuation metrics and corresponding pullbacks in the S&P 500. The extent and length of these corrections varied; some, like the aftermath of the dot-com boom, were protracted and severe, while others were less severe and shorter-lived.
This historical data suggests that at present valuation levels, the market may be primed for a change in direction. That could mean a decline occurring within 2026. Yet, this does not necessarily confirm a crash or a prolonged downturn. Instead, the market may experience a correction or dip while still concluding the year with gains overall.
Factors Influencing Market Trajectory
The potential severity and duration of any downturn will likely hinge on multiple factors, including the durability of AI-related demand and spending, corporate earnings performance in the upcoming quarters, and geopolitical developments that could influence investor confidence or disrupt economic activity.
While the possibility of a market crash cannot be ruled out, it is worth noting that historically, the S&P 500 has eventually recovered from declines and resumed an upward trajectory over the long term. Consequently, investment strategies focused on maintaining composure and holding quality assets have historically proven advantageous in the face of market volatility.