In January, the S&P 500 reached one of its highest valuations in history, recording a cyclically adjusted price-to-earnings (CAPE) ratio of 39.9. Throughout 2026, the index exhibited sideways trading, but historical patterns indicate a potential sharp decline in the coming months. Recent studies indicate that President Trump’s tariffs are detrimentally impacting U.S. companies and consumers, echoing warnings reminiscent of the dot-com crash in October 2000.
President Trump has maintained that foreign exporters would bear the brunt of his tariffs, claiming in a recent Wall Street Journal editorial that they account for “at least 80% of tariff costs.” However, this assertion has been challenged by various studies, including one linked by Trump itself, which stated that U.S. consumers are shouldering a significant portion of the tariff burden. Specifically, findings suggest that Americans paid up to 43% of the tariffs, with the remaining costs falling on U.S. firms. Further analysis from Goldman Sachs estimated that by October 2025, U.S. companies and consumers had absorbed 84% of the tariffs, projecting a 67% share for consumers alone by mid-2026.
Research from the Kiel Institute examined trade shipments totaling $4 trillion and concluded that foreign exporters absorb merely 4% of the tariff burden, with 96% passed on to U.S. importers and consumers. This inflation of costs acts as a de facto tax on consumption, diminishing buying power for consumers and increasing input expenses for businesses. Since consumer spending and business investments constitute about 85% of GDP, these tariffs pose a significant risk to economic growth.
The S&P 500’s elevated CAPE ratio signals potential trouble ahead. Historically, when the CAPE surpasses 39, it correlates with poor future market returns. Data reveals that after hitting these high ratios, the S&P 500 has averaged a 0% return over six months, declined by 4% within a year, and plummeted by 20% over a two-year span.
Given the current market dynamics, many analysts argue that the S&P 500’s high valuations could translate into significant losses, especially as tariffs are likely to curtail economic growth. However, some investors remain optimistic, possibly banking on the anticipated impacts of artificial intelligence driving future earnings growth. In fact, S&P 500 companies observed an earnings acceleration in 2025, with expectations for a continuation into 2026.
In light of these turbulent market conditions, financial advisors suggest that investors should not hastily liquidate their portfolios in fear of an impending downturn. Instead, they recommend evaluating stocks for conviction before selling and adopting a more cautious approach when allocating new funds into the market. Building a cash position can provide a buffer in uncertain times.
Ultimately, the focus should be on long-term wealth creation rather than short-term volatility management. Historically, the S&P 500 has yielded an annual return of 10.2% over the last three decades, and there remains optimism that future decades may yield similar outcomes.
