How many times can the market defy gravity before it finally crashes back to earth? That's the question haunting Wall Street as we head into 2026, with US equity valuations sitting well above their long-term averages after several banner bull years. The consensus bull case points to the S&P 500 hitting around 7,500—a tidy 10% gain—but that rosy scenario assumes continued economic resilience and double-digit earnings growth. There's precious little margin for error.
Wall Street veteran Marc Chaikin isn't buying the optimism. He's forecasting roughly a 65% probability of a bear market in 2026, with average losses around 20%. His timing? A steep decline culminating in a fall 2026 bottom, followed by recovery. Not exactly catastrophic, but brutal enough to ruin portfolios positioned for smooth sailing.
The setup feels ominous. Multiple expansion has already been priced in based on expectations for Fed funds drifting toward 3% and sizable fiscal stimulus. Any policy reversal could trigger a sharp repricing. Meanwhile, concentration risk in mega-cap and AI-linked stocks magnifies the danger—if that narrow group of leaders stumbles, the entire index gets dragged down hard.
Speaking of AI, that's being flagged as one of the primary pitfalls for 2026. Tech stocks already showed weakness in late 2025, with skepticism mounting about returns on massive capex. The AI bubble risk is real. Valuations reflect aggressive assumptions about rapid adoption and profitability, leaving plenty of room for multiple compression if implementation proves slower or less lucrative than modeled.
History offers another warning sign. The ten largest daily moves in the S&P 500 over the past thirty years all occurred in the last five years. Volatility has entered a new regime—rapid, hard-to-hedge selloffs that can shred positions overnight. And while index losses might hover around 20%, individual stocks historically drop 40% to 70% or more during bear markets. Even professional forex traders who typically focus on currency markets are watching these equity warning signs closely, as stock market turbulence often spills over into currency volatility and trading conditions. Central banks and institutional investors are also positioning defensively, recognizing that equity market stress can rapidly transmit across asset classes and trigger broader financial instability. Cross-market contagion could intensify as the BIS Triennial Survey continues to document the growing interconnectedness between equity markets and the $7.5 trillion daily foreign exchange market, where stress in one asset class quickly ripples across global trading volumes.
The pattern is clear: multi-year strong runs often end with sharp drawdowns. Whether 2026 delivers that correction depends on earnings, rates, and sentiment. But the odds? They're not comforting.
