The Stock Market Has a 10% Chance of a 30% Crash in 2026. Here’s What Could Cause It.

Traders work on the floor of the New York Stock Exchange on Dec. 31, 2024 in New York City. (Spencer Platt/Getty Images)

Key Points

• Options trading indicates a 10% chance of a 30% stock market drop in 2026, according to TS Lombard’s Steven Blitz.
• Deutsche Bank’s 2026 Global Markets Survey shows 57% of respondents view a tech bubble bursting as the top risk.
• Technical analysis suggests near-term S&P 500 weakness, with the index closing below its 50-day moving average.

It’s a week until Christmas, and the stock market might not get a Santa rally under the tree this year. There’s a chance 2026 might not be very jolly either.

While the S&P 500 is still up for the year, it’s in the red for December—raising doubts whether the index can eke out a winning streak during the last five sessions of December and the first two of the new year.

That hasn’t stopped a steady stream of upbeat 2026 outlooks from strategists, nearly all of which see high-single or double-digit percentage gains for the benchmark index, including from formerly cautious voices.

Still, stocks’ recent rough patch might mean investors are feeling less confident about the future than they did a couple months ago. There is also a small, but significant, number of investors betting that 2026 will bring a market selloff as bad as—or worse than—this spring’s tariff turmoil.

As TS Lombard’s Chief U.S. economist Steven Blitz writes, options trading suggests the market is pricing in as much of a 10% chance that there will be a 30% drop in the stock market in the coming year. He looked at December 2026 puts, which give holders the right (but not the obligation) to sell an asset at a fixed future price and date.

Since World War II, the S&P 500 embarked on a decline of 30% or more every 12.7 years on average, Blitz writes.

“A 30% decline in 2026 would clearly be ahead of schedule but always remember the lie of averages (head in the oven, feet in the ice box, average is 72 degrees),” he writes. The shortest period between declines or 30% or more was from 1968 to 1973. And widen the pool to declines of 20% or more, and the selloff frequency rises.

That runs counterintuitive to recent strong corporate earnings and economic data that have underpinned much of the optimism for 2026, beyond artificial intelligence. Blitz writes that it’s easy to assume stronger growth and higher inflation are the logical outcome of near-term fiscal and monetary policies.

But we can’t know the true state of the economy for 2026, given the roller coaster of data related to the changing tariff situation throughout the year.

“Built into this projection is the notion that the Federal Reserve is now laying the groundwork for a higher inflation outcome, because they are easing into an improving economy,” he writes. “I will be more than happy if the strong growth/high inflation outcome comes to pass, but when an outlook seems so obvious, it rarely works out that way.”

Citi is one of the firms calling for more S&P 500 gains next year. Even so, its global chief economist, Nathan Sheets, said in a recent podcast that markets are pricing in the assumption that the new Fed chair will act as current chair Jerome Powell has done—reasonable enough to a point.

“But obviously that’s another source of uncertainty,” he said, and he isn’t the only one concerned about Fed independence.

Likewise, Jim Reid, Deutsche Bank’s global head of macro and thematic research, is one of the most bullish strategists, but is aware of risks to the market. He notes that 57% of respondents to his firm’s 2026 Global Markets Survey ranked the tech bubble bursting as the No. 1 risk in the year ahead—no single risk has scored that high above the rest before. In second place, more than a quarter of respondents worry that a new Fed chair pushing for aggressive interest-rate cuts will trigger market turmoil.

Reid isn’t worried, arguing that the new chair won’t be able to strong-arm the whole committee into rate cuts. Plus, he says the very existence of such prominent tech bubble fears shows there’s no euphoria, but rather more measured enthusiasm.

“That said, today’s AI leaders are individually far larger—and more systemically important—than almost any stock was in 2000,” he notes.

Technicals aren’t supportive near-term either, notes Renaissance Macro Research’s chief market technician Jeffrey deGraaf. The S&P 500 stalled after its previous highs in October and earlier this month, and closed under its ascending 50-day moving average on Wednesday.

“This is less worrisome given the recent high in equal-weighted SPX, but underscores the sloppy, non-momentum nature of the current tape,” he writes.

Of course, this could be a temporary blip—a natural pause in an aging bull market that has already delivered double-digit percentage gains this year. As DataTrek co-founder Nicholas Colas reminded us earlier this week, since 1980, the index is more likely to make new December highs in the back half of the month.

Nonetheless if the market doesn’t make strides over the remainder of the holiday season, investors won’t be feeling very merry.

Write to Teresa Rivas at teresa.rivas@barrons.com