U.S. Stocks could fall sharply as high valuations collide with economic headwinds created by President Trump’s tariffs.
Tariffs and Market Uncertainty
The S&P 500 has shown limited movement this year, while global markets outside the U.S., as measured by the iShares MSCI ACWI ex US ETF, have advanced approximately 10%. According to Charles Schwab strategist Kevin Gordon, the S&P 500 has not underperformed to this degree in 30 years.
Concerns over President Trump’s policies, coupled with high valuations, are driving investors away from U.S. Stocks. This comes after President Trump announced a 15% global tariff following a Supreme Court decision striking down previous tariffs imposed under IEEPA.
Economic Impact of Tariffs
Studies by the Congressional Budget Office, the Federal Reserve Bank of New York, the Kiel Institute, and the National Bureau of Economic Research indicate that U.S. Businesses and consumers have borne the brunt of President Trump’s tariffs, accounting for roughly 90% of the cost. This means that money which could have supported economic growth is instead being used to pay tariffs, potentially lowering GDP.
Data from 2025 shows the U.S. Economy added only 181,000 jobs – the lowest number since 2009, excluding the pandemic period – and expanded by just 2.2%, the slowest growth in a decade. PCE inflation reached 2.9% in December 2025, the highest reading since March 2024.
Market Valuation and Future Outlook
In January 2026, the S&P 500’s cyclically adjusted price-to-earnings (CAPE) ratio reached 40.2, a level not seen since the dot-com crash in September 2000. Historically, the S&P 500 has only recorded a monthly CAPE ratio above 40 on 21 occasions since 1957.
Based on historical averages, the S&P 500 could decline 3% by February 2027, 19% by February 2028, and 30% by February 2029. However, future earnings growth driven by artificial intelligence could potentially offset these declines.
Frequently Asked Questions
What is a CAPE ratio?
The cyclically adjusted price-to-earnings (CAPE) ratio is a valuation measure that divides the current stock price by the average inflation-adjusted earnings over the past 10 years.
What happened with the Supreme Court and President Trump’s tariffs?
The Supreme Court struck down tariffs imposed by President Trump under the International Emergency Economic Powers Act (IEEPA). In response, President Trump announced a 15% global tariff using Section 122 of the Trade Act of 1974.
Who is paying for these tariffs?
Studies suggest that U.S. Businesses and consumers are paying the vast majority – around 90% – of President Trump’s tariffs.
Given these economic indicators and market valuations, how do you assess the potential risks and opportunities in the current investment landscape?
