The prospect of a recession in the United States during 2026 remains uncertain, with leading economic institutions presenting modest probabilities. J.P. Morgan Global Research estimates the chance of a recession within this year at approximately 35%. The Federal Reserve Bank of New York, utilizing Treasury yield curve spreads, indicates an even lower likelihood of recession by November 2026. While these projections are cautiously optimistic, the possibility of economic contraction cannot be ruled out entirely.
In light of this potential, an important question arises: should investors consider purchasing stocks if a recession materializes in 2026? To explore this, it is instructive to review how the stock market, particularly the S&P 500 index, has historically reacted during recessionary periods.
Historical Context of the S&P 500 During Recessions
The S&P 500 index, comprising 500 of the largest publicly traded U.S. companies, was established in its current iteration in March 1957. Since then, the U.S. economy has entered 10 recognized recessions. Examining how the index performed during the years each recession began reveals notable trends.
The initial recession after the S&P 500's establishment commenced rapidly, merely five months later in August 1957, triggered by Federal Reserve interest rate hikes aimed at curbing inflation. This recession endured for eight months, during which the S&P 500 declined by 11% in its first complete year.
Subsequent recessions in 1960 and 1969 led to more moderate stock market declines, with the S&P 500 dropping approximately 2% and nearly 11% respectively during those years. The recession starting in 1973, induced largely by the Arab oil embargo, resulted in a steeper market impact, with the index tumbling 19%.
The early 1980s witnessed a "double-dip" recession: the first beginning in 1980 lasted six months, followed by a second starting in July 1981. In 1980, despite the recession, the S&P 500 ended the year significantly higher by almost 24%. However, the following year saw the index fall nearly 8% amid the continued economic contraction.
Later recessions began in 1990 and 2001. Both saw declines in the S&P 500 during their inception years. Notably, the 2001 recession coincided with the aftermath of the dot-com bubble burst. The Great Recession, starting in December 2007, presented an atypical pattern: the S&P 500 rose by over 4% that year but commenced a sharp decline in the final months, ultimately plummeting almost 41% in 2008. Similarly, the COVID-19 recession in 2020 caused a swift market sell-off; however, the downturn was brief, and the index rebounded to finish the year up roughly 16%.
The overarching pattern reveals that the S&P 500 often suffers negative returns during years in which recessions begin. Exceptions occur primarily when recessions are brief or start late in a calendar year. These dynamics underscore the volatility and timing sensitivity embedded within recessionary stock market environments.
Longer-Term Market Returns Following Recessions
Extending the analysis beyond the recession onset year provides clearer insights. When examining the S&P 500's performance five and ten years after recession starts, stronger trends materialize.
| Recession Start | S&P 500 Gain/Loss 5 Years Later | S&P 500 Gain/Loss 10 Years Later |
|---|---|---|
| August 1957 | +24% | +103% |
| April 1960 | +56% | +59% |
| December 1969 | -21% | +14% |
| November 1973 | -1% | +64% |
| January 1980 | +53% | +223% |
| July 1981 | +90% | +193% |
| July 1990 | +50% | +306% |
| March 2001 | -17% | -25% |
| December 2007 | -5% | +77% |
| February 2020 | +309% | To be determined |
Data compiled from YCharts illustrates that in most instances, the S&P 500 achieved substantial appreciation within five years following the recession onset, averaging around a 54% gain. Ten-year returns post-recession are even more compelling, averaging an increase of nearly 113%, with the notable exception of the 2001 recession linked to the dot-com bubble collapse, which experienced negative returns over both horizons.
Remarkably, periods following severe economic stressors, including the 2007 financial crisis and the 2020 COVID-19 recession, still saw robust market recoveries within subsequent years.
Implications for Investors Considering 2026
Returning to the question of investment strategy in the face of a possible 2026 recession, the historical record suggests that for investors with a long-term perspective, purchasing stocks during recessionary periods tends to be beneficial over time.
Market downturns linked to recessions commonly bring short-term reductions in equity values. Nonetheless, these phases have historically been followed by significant recoveries and growth over five to ten years. Investors engaging with diversified portfolios or index funds reflecting the broad market, such as the S&P 500, might anticipate solid gains provided they maintain a long-term investment horizon.
While predictive certainty around the timing or occurrence of a 2026 recession does not exist, historical performance data underscores the advantage of sustained stock market participation through economic cycles rather than attempts at market timing based on recession fears.
Key Points:
- The probability of a U.S. recession occurring in 2026 is viewed as low by major forecasts, but remains uncertain.
- The S&P 500 index commonly experiences negative returns during recession onset years, with variability depending on recession duration and start timing.
- Long-term trends indicate strong average gains in the S&P 500 five and ten years following recessions, supporting the case for continued stock investment during economic downturns.
Risks and Uncertainties:
- Recession severity and length vary, influencing the depth and duration of stock market downturns.
- Historical market recoveries may not guarantee similar outcomes for future recessions, as each economic cycle has unique factors.
- Short-term stock volatility during recession periods can lead to substantial temporary losses, not suitable for investors requiring liquidity or short-term capital preservation.
Disclosure: This analysis is based on historical data and current economic forecasts and does not constitute financial advice. Investment decisions should be made in consideration of individual risk tolerance and financial objectives.