Three factors that have preceded double-digit stock-market declines are all present in 2026.
“Bad years for the S&P 500 are due to very specific factors, not just bad luck or arbitrary changes in investor sentiment,” said Nicholas Colas, co-founder of DataTrek, in commentary shared with MarketWatch on Tuesday.
Colas focused his analysis on years where the S&P 500 lost at least 10% on a total-return basis, which factors in earnings from reinvested dividends. He found 12 years that met this criteria going back to 1928.
During those years, recession, military conflict and unexpected shifts in the Federal Reserve’s monetary policy were largely responsible for the steep declines, Colas said. Recession was the most frequent culprit, responsible for driving losses of 10% or greater in eight of the 12 examples.
“Equity markets are rightfully skittish just now, because all three factors are in play,” said Colas.
He pointed to the jump in crude-oil prices amid fighting in the Middle East that has no clear end in sight, warning that “higher oil prices could cause a recession.” Elevated oil prices also raise worries about inflation, putting the Fed in a more difficult position. “The longer this continues, the more likely it is that the Fed may have to raise rates, and it is unclear by how much,” said Colas.
Recessions “can hit hard,” he added, citing an average loss of around 25% in the “bad years” for the S&P 500.
“Equity valuations are the most notable difference when it comes to explaining why some recessions have hit U.S. stocks harder than others,” he said. “If stocks are statistically ‘cheap,’ a recession is less likely to cause them to decline” by more than 10%, Colas found.
Even though valuations have come down over the past few months, stocks are still looking expensive these days, he said, and that could easily become a problem. The S&P 500’s Shiller price-to-earnings ratio, which compares the price of the index with companies’ inflation-adjusted earnings over the course of a 10-year cycle, currently stands at 37.5, Colas noted. By comparison, at the start of years when the S&P 500 saw major double-digit declines due to a recession, the average Shiller P/E ratio stood at 21.3.
The U.S. stock market has struggled in March, falling in the wake of U.S. and Israeli airstrikes on Iran starting at the end of February. The S&P 500 has dropped 4.7% so far this month — on track for its biggest monthly loss since March 2025, according to FactSet data. The index is also heading for a quarterly decline, which would be its first since the first quarter of 2025. The S&P 500 ended Tuesday down 4.2% year to date.
Despite all of this, Colas has a more optimistic outlook for the U.S. market this year. “There is still time to avoid a double-digit loss in 2026, but the clock is ticking,” he said.
The outcome could hinge on a swift de-escalation of Mideast tensions, leading to a drop in crude-oil prices. “We remain bullish because we expect these to occur,” he added.
For investors who disagree, or “simply want to hedge an adverse outcome,” only gold has a strong track record of weathering further stress in U.S. stocks, according to Colas. However, the yellow metal has been hit pretty hard since the start of the Iran conflict, recently falling into bear-market territory — defined as a drop of 20% or more from a recent high.
The U.S. stock market closed lower Tuesday, with the S&P 500 falling 0.4%, the Dow Jones Industrial Average shedding 0.2% and the technology-heavy Nasdaq Composite Index dropping 0.8%, according to FactSet data.
