Option market "perspective" on US stocks in 2026: Probability of a 30% crash reaches 10%, alert to "pain index"

Economist Steven Blitz has conducted a recent analysis that shows the options market is currently estimating an 8-10% probability of the S&P 500 index falling 30% or more at some point in 2026. By observing the put options on the S&P 500 index expiring in December 2026, Blitz found their pricing to be highly consistent with historical averages. Since World War II, the average interval for the S&P 500 index to experience a decline of 30% or more (peak to peak) is 12.7 years. Since 1982, this average interval has slightly shortened to 11.8 years. Blitz wrote in the research report, "An 8% probability corresponds to the historical average frequency (a crash occurring every 12.5 years), while a 10% probability implies a one in ten chance." Crashes often come in clusters However, Blitz warned that significant market declines often exhibit clustering patternsoccurring in quick succession over a short period, followed by a long period of calm. From 1966 to 1982, there were five declines of 20% or more, with an average interval of only 3.7 years. In contrast, from 1982 to 2019, there were only three such declines, with an average interval of nine years. The key difference between these two periods lies in the trend of the "misery index" (the sum of the unemployment rate and year-over-year inflation rate). During the frequent crashes from 1966 to 1982, the misery index rose from 5.5 to 16. In the period with fewer crashes from 1982 to 2019, this index fell from 16 to 5.5. Currently, the misery index has risen from 5.2 in 2019 to 7.4, implying that the economy may be entering a period of more frequent recessions. Gig economy masking weakness Blitz pointed out that the gig economy has become a "safety valve" for unemployed workers, helping to explain why unemployment has not translated into a surge in unemployment insurance claims. Blitz said, "For example, Uber drivers make more than unemployment benefits, there's no time limit, and as long as high-end employment remains stablelargely thanks to stable or rising stock valuesthis income will continue." In November, the number of self-employed workers in non-corporate forms surged from 9.7 million in September to 10.3 million, while the proportion of workers with multiple jobs as a percentage of total employment rose from 5.4% to 5.7%, both reaching the highest levels since the 2008-09 economic recession. Stock market valuations still too high Against this backdrop of economic weakness, Blitz observed that the stock market is still overvalued according to most measures, and their proprietary liquidity index also suggests downward pressure on the stock market. Although the general view predicts stronger economic growth in 2026 along with higher inflation, Blitz expressed caution, stating, "When a future looks so obvious, it rarely plays out as expected." His conclusion is that, while the pricing of options in the market seems reasonable based on historical averages, the collective pressures facing the U.S. and global economies, overvalued stock market, and rising misery index indicate that the pricing of downside risk insurance (i.e., put options) may still be too low. He said, "This is not a prediction of a crash, but then again, no one predicts their house will burn down, yet people still buy fire insurance. Insurance always seems cheap when you don't need it. That's the key."