The stock market just had a winning week, the Supreme Court knocked down tariffs, and everyone’s feeling good. So naturally, it’s the perfect time to talk about what could go wrong.
Prediction markets are flashing a warning that most investors would rather ignore. On Kalshi — the exchange where traders bet real money on real-world outcomes — contracts currently price a 58% probability that the S&P 500 drops to 6,200 or below at some point in 2026. That’s an 11% decline from the record high of 6,979, which puts the index squarely in correction territory. The odds of a 15% drop? 39%. And a full bear market (20%+ decline)? The implied probability falls below 39%, but that’s where things get interesting — because history says those odds are way too low.
Here’s the uncomfortable math: 2026 is a midterm election year. And midterm election years are historically brutal for stocks. The S&P 500 has suffered a median intra-year drawdown of 19% during midterm years — meaning half the time, stocks fell that much or more before recovering. When it’s a midterm year with a new president (someone who wasn’t in the White House the prior term), the median drawdown deepens to 21%. That puts the historical odds of a bear market in 2026 at roughly 50% — far higher than what prediction market traders are currently pricing.
Why do midterm years hurt so much? Uncertainty. The president’s party almost always loses seats in Congress, which throws a wrench into the fiscal, trade, and regulatory policy outlook. Investors hate uncertainty more than they hate bad news, and midterm seasons deliver it in spades.
There’s a silver lining, though — and it’s a big one. The six months following midterm elections (November through April) have historically been the strongest six-month stretch in the entire four-year presidential cycle. According to Carson Investment Research, the S&P 500 has averaged a 14% return during that window. So even if 2026 gets ugly in the middle, history suggests the back end could deliver powerful gains for investors who held on.
The current setup adds another layer of risk. The S&P 500 trades at 21.5 times forward earnings — above its 5-year average of 20x. Wall Street expects 15% earnings growth this year, the fastest in five years. But those expectations are already baked into prices. If companies merely meet estimates instead of beating them, elevated multiples become hard to justify. For now, the market is priced for perfection in a year that history says is anything but. Smart money is building cash positions and making sure their portfolios can handle a storm — even if the sun is shining today.