The U.S. stock market has stumbled in 2026. The benchmark S&P 500 (^GSPC 1.33%) has fallen more than 3% even though most companies reported better-than-expected earnings in the fourth quarter.
Investors are worried about valuations, especially among artificial intelligence stocks. In fact, the S&P 500 sounded an alarm in February: A popular valuation metric reached its highest level since the dot-com crash.
Meanwhile, uncertainty surrounding President Trump’s tax and trade policies has added to the sense of disquiet. While the administration has relentlessly promoted tariffs as a path to greater prosperity, recent economic data challenges that idea. Here’s what investors should know.
Image source: Official White House Photo by Andrea Hanks.
Investors get bad news about President Trump’s economy
Trump says his tariffs are an “economic miracle” that brought America back from the brink of disaster. But recent data suggests his tariffs have actually been an economic headwind, just as countless experts predicted they would be.
GDP and jobs growth numbers in 2025 were the worst since 2020
Gross domestic product (GDP) increased 2.2% last year, the slowest economic growth since COVID-19 caused a recession in 2020. And excluding the pandemic, 2025 was the worst year for the U.S. economy since 2016, a particularly unsettling fact given that artificial intelligence spending accounted for more than one-third of GDP growth last year. In other words, GDP growth would have been dismal without AI.
Meanwhile, businesses navigated uncertainty created by Trump’s tariffs by hiring fewer employees. The U.S. economy added 181,000 in 2025, down from 1.5 million in the previous year. In fact, the jobs market has not been so sluggish since COVID-19 forced business closures in 2020. And excluding the pandemic, 2025 was the worst year for jobs growth since 2009.
Gasoline prices just hit levels last seen in the summer of 2024
Gas has generally become less expensive under Trump, but that changed when the U.S. and Israel attacked Iran. Brent crude oil prices (an international benchmark) have increased about 25% in the past week, and U.S. consumers are already paying more at the pump. The average price per gallon of unleaded gasoline is now at its highest level since the summer of 2024.
Economic growth could remain sluggish because of tariffs and rising gas prices
Slowing economic growth could be dismissed, or at least partially dismissed, as a product of the 43-day government shutdown in the fourth quarter. However, sluggish economic growth is harder to overlook when considered alongside the weak jobs market.
Meanwhile, consumer spending, the primary engine of economic expansion, is being hit from multiple angles. Several studies show Trump’s tariffs are being paid by U.S. businesses and consumers. Now, rising gas prices threaten to further reduce consumers’ disposable income. That could translate into weak economic growth in the future.
The stock market sounds an alarm last witnessed during the dot-com crash
In February, the S&P 500 recorded a cyclically adjusted price-to-earnings (CAPE) ratio of 39.8. Apart from the last two months, that is the highest valuation since the dot-com crash in October 2000. Put differently, the U.S. stock market has not been this expensive in 25 years.
So what? Historically, the S&P 500 has delivered dismal results after recording a monthly CAPE multiple above 39. The following chart provides specific details.
|
Holding Period |
S&P 500’s Average Return |
|---|---|
|
6 months |
0% |
|
1 year |
(4%) |
|
2 years |
(20%) |
Data source: Robert Shiller.
Here’s what the chart means: If forward returns align with the historical average, the S&P 500 will trade sideways during the next six months, but the index will decline 4% by February 2027 and it will drop 20% by February 2028.
Of course, past performance is never a guarantee of future results. But investors would be foolish to dismiss this warning. Rich valuations alone are unlikely to cause a market downturn, but a correction is certainly possible when rich valuations are combined with a somewhat sluggish economy, a weak jobs market, and rising oil prices.
Does that mean you should sell your stocks? Absolutely not. Attempting to time the market can lead to missed opportunities. Continue to hold the stocks whose earnings you believe will be materially higher five years from now. But be prudent when putting money into the market. Don’t buy any stocks would feel uncomfortable holding through a downturn, and only buy stocks that trade at reasonable valuations.
