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

Authors: Keith Speights

Publisher:

The Motley Fool

Published: 10/19/2025

Language:English

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Elon

Good morning Norris, I'm Elon, and this is Goose Pod for you. Today is Thursday, November 13th.

Morgan Freedman

I'm Morgan Freedman, we are here to discuss Is the Stock Market Going to Crash in 2026?

Elon

The signals are screaming red alert. The Buffett indicator is at an insane 219%, an all-time high. Buffett himself said anything near 200% is 'playing with fire.' We're not just playing with it, Norris, we are juggling torches in a hurricane.

Morgan Freedman

And it’s not a lone voice in the wilderness. The Shiller CAPE ratio, another trusted guide, is at its second-highest level in history. I've often found that when two separate, reliable maps point to the same treacherous waters, it's wise to pay attention.

Elon

It feels just like the dot-com bubble, but supercharged with AI. Experts are pointing out that the top 10 companies are even more overvalued now than in the 90s. This isn't just a boom, it's a rocket ship with no reverse thrusters.

Morgan Freedman

Human enthusiasm for the new and the novel can often outpace the practical reality. While today's technology giants are immensely profitable, unlike their dot-com predecessors, the fundamental question remains: does the price reflect true value, or does it merely reflect our collective hope?

Morgan Freedman

To truly understand the gravity of these warnings, one must appreciate their elegant simplicity. The Buffett Indicator, for instance, just compares the total value of the stock market to the country's entire economic output, its GDP. It's a simple check on the nation's financial health.

Elon

Exactly. If the stock market's valuation is more than double the entire country's economic engine, something is fundamentally out of balance. Buffett suggested that a ratio of 70% to 80% is a green light to buy. We are so far past that point, we can't even see the green light.

Morgan Freedman

And history has been a faithful student of his wisdom. The indicator flashed warning signs before the dot-com bust in 2000 and again before the downturn in 2022. It’s like a seasoned mariner reading the sky; it doesn't tell you the exact moment the wave will crash, but it assures you a storm is gathering.

Elon

Then there's Robert Shiller's CAPE ratio. It's a bit more methodical, analyzing earnings over a ten-year cycle to smooth out the market's emotional highs and lows. But it tells the exact same, chilling story. It spiked before the great crash of 1929, before 2000, and again in 2021. It's a pattern.

Morgan Freedman

It poses the question, 'Are we paying a fair price based on a decade of proven performance, or are we simply caught in a fleeting moment of irrational exuberance?' At this moment, the evidence seems to lean quite heavily toward the latter. The market's pulse is racing.

Elon

So the data is crystal clear, a major correction seems inevitable. Yet, you have the eternal bulls who chant, 'this time is different.' They argue that expecting a drop is just acknowledging normal market volatility, not a sign of a true bear market. It's a colossal failure of imagination.

Morgan Freedman

There is a certain truth to their perspective. The market has always taken steps back on its long journey forward. An average year often includes a 14% dip. A bullish investor would argue that today's high valuations are justified by the sheer force of innovation and future growth.

Elon

But that's an incredibly risky bet. It's like we're in Schrödinger's box. Is the market a bull or a bear? We're stuck in this indeterminate state, waiting for the reality to hit. And these indicators are strongly suggesting the cat, well, the cat might not make it.

Morgan Freedman

Ultimately, the conflict is as old as markets themselves. It's the timeless battle between the hard data of the past and our boundless belief in the future. The most likely truth, as it so often does, resides somewhere in the tense space between the two.

Morgan Freedman

When these speculative bubbles finally burst, the impact is never neatly contained to Wall Street. It sends powerful ripples through the entire economy. A significant crash affects everything from national GDP growth to local employment rates. It's not just numbers on a screen; it's people's lives.

Elon

Absolutely. Consumer spending grinds to a halt. People lose confidence, they stop buying, and that puts the brakes on the whole economic machine. The financial industry itself takes a massive hit, and you start hearing whispers of systemic risk, where one failure can trigger a devastating cascade.

Morgan Freedman

It serves as a profound reminder of how deeply interconnected our financial world has become. The sentiment of the market can quickly become the sentiment of the nation. It tests our resilience, both as an economy and as individuals who are part of it.

Elon

So what's the strategic move? You can't just bury your head in the sand. Preparation is key. This means avoiding the hype, focusing on companies with real, tangible value relative to their growth, and keeping some cash ready for the opportunities that always arise from a downturn.

Morgan Freedman

And through it all, it is essential to maintain a long-term perspective. Markets have a perfect record of recovering from every single crash in history. The storm always passes, and the sun does rise again. The secret is simply having your ship in order to weather it.

Elon

That's the end of today's discussion. Thank you for listening to Goose Pod.

Morgan Freedman

See you tomorrow.

Two key indicators, the Buffett indicator and Shiller CAPE ratio, are flashing red, suggesting a potential stock market crash by 2026. Both metrics are at historically high levels, mirroring past bubble conditions. While innovation drives current valuations, experts warn against irrational exuberance, emphasizing preparation and long-term perspective.

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

Read original at The Motley Fool →

These stock market valuation metrics look ominous. You've no doubt heard the phrase, "What goes up can come down." This adage continually lurks in the background of the brains of many investors who have lived long enough. They know that the good times never keep rolling indefinitely. For now, the good times are rolling.

All the major stock market indexes are near record highs. But is the stock market going to crash in 2026? Image source: Getty Images. Warren Buffett's favorite valuation indicator One big reason for investors to be worried relates to an indicator popularized by none other than Warren Buffett. The investing icon said in an article published by Fortune in 2001 that the ratio of total market capitalization to gross national product (GNP) was "probably the best single measure of where valuations stand at any given moment."

This metric became known as the Buffett indicator, with gross domestic product (GDP) replacing GNP over time. Buffett said something else in that 2001 article that's haunting, though. He stated that if the ratio ever gets close to 200%, investors are "playing with fire." History proves that the Oracle of Omaha was right.

As Buffett noted in the Fortune article, the indicator that now bears his name approached 200% in 1999 and part of 2000. What happened next? The dot-com bubble burst, with the stock market (especially the tech-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC)) beginning a multiyear decline. ^IXIC data by YCharts.

The Buffett indicator came close to 200% again in late 2022. Within a couple of months, the S&P 500 (SNPINDEX: ^GSPC) peaked. A bear market soon ensued, with the S&P 500 falling more than 25% below its high at one point. ^SPX data by YCharts. Guess what the Buffett indicator's level is right now? It's at an all-time high of 219%.

Per Buffett's own words, investors are "playing with fire." Robert Shiller's namesake indicator Buffett isn't the only financial legend with a valuation metric bearing his name. Yale economics professor Robert Shiller co-developed the cyclically adjusted price-to-earnings (CAPE) ratio, which became known as the Shiller CAPE ratio.

This indicator averages inflation-adjusted earnings over the previous 10 years for a company or a stock market index. The idea is that looking at a longer period provides a better perspective that smooths out the impact of economic cycles. The S&P 500 Shiller CAPE ratio has been eerily prescient in predicting major stock market declines.

Note the spike in 1929 on the chart below. It preceded the infamous stock market crash in October of that year. The highest value ever for the metric came in late 1999 and early 2000. As previously mentioned, the dot-com bubble burst soon afterward. Another peak occurred in late 2021, with the stock market plunging the following year.

S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically adjusted price-to-earnings ratio. You might have noticed that the S&P 500 Shiller CAPE ratio is at its second-highest level ever right now. If history is a guide, a market downturn could be right around the corner. Is a crash coming next year?

These two indicators are flawless in forecasting market meltdowns. So, is a stock market crash inevitable next year? I wouldn't go that far. It's important to note that there are few historical precedents for the Buffett indicator and the S&P 500 Shiller CAPE ratio hitting super-high levels. As such, they don't meet the requirements for being statistically significant.

Also, stocks can remain at frothy valuations for long periods. Former Federal Reserve Chairman Alan Greenspan famously used his "irrational exuberance" phrase describing the stock market on Dec. 5, 1996. The S&P 500 nearly doubled between then and the end of 1999. However, I don't think investors should ignore the Buffett indicator and the S&P 500 CAPE ratio.

These indicators absolutely point to historically high valuations. Don't assume that a stock market crash is on the way, but be prepared for one just in case. That means buying stocks that are valued attractively relative to their growth prospects and building cash reserves. Most importantly, though, maintain a long-term perspective.

Stocks ultimately rebounded and set new highs following all the stock market crashes in the past. They'll almost certainly do so after the next crash -- whenever it happens. Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The Motley Fool has a disclosure policy.

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