In January, the S&P 500 recorded one of its highest valuations in history.
The S&P 500 (^GSPC +1.97%) has essentially traded sideways in 2026, but history says the benchmark index could decline sharply in the coming months.
Several recent studies show President Trump’s tariffs are siphoning money away from U.S. companies and consumers, and the S&P 500 just flashed a warning last seen during the dot-com crash in October 2000.
Here’s what investors should know.
Image source: Official White House Photo by Andrea Hanks.
Recent studies suggest President Trump’s tariffs will slow economic growth
President Trump has repeatedly argued that foreign exporters will pay his tariffs for the privilege of doing business in America. He went further last month in an editorial published by The Wall Street Journal, claiming foreign companies were “paying at least 80% of tariff costs.” He even linked a study from the Harvard Business School to validate his claim.
What’s the problem? The study Trump linked made no such claim. In fact, the researchers arrived at the opposite conclusion. The report states, “Our results suggest that U.S. consumers paid up to 43% of the tariff burden, with the rest absorbed by U.S. firms.”
Those results roughly align with research from other institutions. Goldman Sachs economists report that U.S. companies and consumers collectively paid 84% of tariffs in October 2025. And they estimate consumers alone will bear 67% of the burden by July 2026.
Similarly, the Kiel Institute examined shipments totaling $4 trillion between January 2024 and November 2025, and the researchers concluded, “Foreign exporters absorb only about 4% of the tariff burden.” The other 96% is passed along to U.S. importers and consumers.
Trump’s tariffs are effectively a tax on consumption, which means they reduce buying power for consumers and raise input costs for businesses. That’s a problem because consumer spending and business investments account for approximately 85% of GDP. By siphoning money away from consumers and businesses, tariffs threaten to slow economic growth.
The stock market sounds an alarm last witnessed during the dot-com crash
The S&P 500 recorded an average cyclically adjusted price-to-earnings (CAPE) ratio of 39.9 in January 2026, marking the fourth consecutive monthly reading above 39. Prior to that, the S&P 500 last recorded a monthly CAPE ratio over 39 during the dot-com crash in October 2000. The CAPE ratio is used to determine whether entire stock market indexes are overvalued, and multiples above 39 have historically correlated with dismal future returns.
The table shows the S&P 500’s best, worst, and average performance over different time periods following a monthly CAPE reading above 39.
|
Time Period |
S&P 500’s Best Return |
S&P 500’s Worst Return |
S&P 500’s Average Return |
|---|---|---|---|
|
Six months |
16% |
(20%) |
0% |
|
One year |
16% |
(28%) |
(4%) |
|
Two years |
8% |
(43%) |
(20%) |
Data source: Robert Shiller. Table by author.
As shown, after recording a monthly CAPE ratio above 39, the S&P 500 has returned an average of 0% during the next six months. But the index has declined by an average of 4% in the next year, and it has declined by an average of 20% in the next two years.
The big picture
The S&P 500 currently trades at an expensive valuation that has historically portended steep losses. Such an outcome is arguably more likely in the current market environment because President Trump’s tariffs threaten to slow economic growth.
Of course, past performance is never a guarantee of future results. Investors may tolerate higher valuation multiples because artificial intelligence (AI) is likely to drive higher earnings growth in the future. Indeed, S&P 500 companies reported an acceleration in earnings in 2025, and Wall Street expects another acceleration in 2026.
So, investors should not sell their portfolios in anticipation of a market drawdown. Instead, now is a good time to sell any stocks in which you lack conviction. It’s also a good time to be more conservative when you put money into the market. Rather than investing every dollar, consider building a cash position in your portfolio.
Above all, focus on creating wealth over the long term rather than navigating volatility in the short term. The S&P 500 has returned 10.2% annually over the last 30 years, and there is no reason to believe the next 30 years will be much different.
