Predictions from traders on Kalshi, a prominent prediction market, suggest that an S&P 500 correction is expected in 2026. Historical trends indicate that market declines could be even sharper as midterm elections approach. As the index has displayed sideways trading in early 2026, investors are contemplating the likelihood of a significant downturn during the year.
Contracts on Kalshi indicate that the probability of an S&P 500 drop to 6,200 or lower is pegged at 58%, implying that traders are anticipating an approximate 11% decline from its peak of 6,979. Furthermore, there’s a 39% chance that the index may experience a 15% drop to around 5,900. However, no contracts suggest a bear market, which typically requires a 20% decline, implying the odds are estimated to be less than 39% currently. This appears to be at odds with historical data that suggests traders may be underestimating the likelihood of a bear market.
Historically, midterm election years have led to poorer performance for the S&P 500. The incumbent president’s party typically loses congressional seats, creating an atmosphere of uncertainty regarding fiscal and regulatory policies. This uncertainty often results in increased market volatility. Data shows that the S&P 500 has a median intra-year drawdown of 19% during midterm election years. This figure rises to a median drop of 21% when a new president, who was not in office during the prior term, is in the White House. Thus, historical analysis indicates a 50% chance of at least a 21% drop in the S&P 500 this year, significantly higher than the probabilities currently shown on prediction markets.
Despite potential declines in the midterm year, there is a typical post-election rebound in the stock market. Historical performance underscores that the six months following midterm elections (from November to April) tend to be the strongest of the four-year presidential cycle, with an average return of 14% in the S&P 500 during that timeframe.
Market speculation is currently optimistic, with analysts projecting a 15% increase in S&P 500 earnings for 2026, marking the fastest growth in five years. However, the index’s existing valuation—trading at 21.5 times forward earnings compared to a five-year average of 20—implies that much of this potential upside may already be factored into current prices.
Investors are thus cautioned to tread carefully in this market environment. It’s advisable for them to only invest in stocks they are willing to hold through potential downturns and to consider allocating a larger cash position as a buffer against market volatility. The interplay of earnings reports and market sentiment will play a crucial role in determining whether the stocks can justify their elevated valuations and maintain upward momentum.
