Could the stock market be setting up for a major fall? One indicator is flashing a warning sign not seen since the dot-com crash, and Trump-era tariffs may be making things worse.
Key Points
- Studies suggest Trump’s tariffs are largely paid by U.S. consumers and businesses, not foreign exporters.
- A key valuation metric, the cyclically adjusted price-to-earnings (CAPE) ratio, is at levels last seen during the dot-com bubble.
- Historically, high CAPE ratios have correlated with poor stock market returns in the following years.
- While the future is uncertain, now may be a good time to re-evaluate your portfolio and build a cash position.
Trump’s Tariffs: Hurting Us More Than Them?
President Trump claimed foreign companies were “paying at least 80% of tariff costs.” But is that true?
The Data Says Otherwise
A study Trump cited from Harvard Business School actually concluded that “U.S. consumers paid up to 43% of the tariff burden, with the rest absorbed by U.S. firms.” Ouch!
Goldman Sachs economists estimate that U.S. companies and consumers collectively paid 84% of tariffs in October 2025. The Kiel Institute found that foreign exporters absorb only about 4% of the tariff burden.
Tariffs act like a tax on consumers and businesses, reducing buying power and raising costs. Since consumer spending and business investments make up 85% of GDP (Gross Domestic Product, a measure of a country’s economic output), this could significantly slow economic growth.
Echoes of the Dot-Com Crash?
The stock market might be sending a concerning signal reminiscent of the dot-com bubble.
The CAPE Ratio’s Warning
In January 2026, the S&P 500’s average cyclically adjusted price-to-earnings (CAPE) ratio hit 39.9. The CAPE ratio is a valuation measure that adjusts earnings for inflation over a 10-year period. Think of it as a sophisticated way to gauge if the market is overvalued.
Prior to 2026, the last time the CAPE ratio was this high was in October 2000, during the dot-com crash. Historically, high CAPE ratios have foreshadowed weak market performance.
Historical Performance After High CAPE Ratios
Here’s how the S&P 500 performed after previous instances of a CAPE ratio above 39:
Six months: Best return 16%, Worst return (20%), Average return 0%.
One year: Best return 16%, Worst return (28%), Average return (4%).
Two years: Best return 8%, Worst return (43%), Average return (20%).
As you can see, the average returns are not pretty.
Stocks Mentioned
- ^GSPC +1.97%
What This Means For You
- Re-evaluate your portfolio: Now is a good time to assess your holdings and consider selling any stocks you’re not confident in.
- Build a cash position: Instead of investing every dollar, consider holding some cash to take advantage of potential future dips.
- Focus on the long term: Don’t get caught up in short-term market swings. The S&P 500 has historically delivered strong returns over the long run.
- Consider dollar-cost averaging: This involves investing a fixed amount of money at regular intervals, regardless of the market price. This can help reduce risk and smooth out returns over time.
- Remember: Past performance doesn’t guarantee future results. But being aware of potential risks can help you make informed investment decisions.
Source: www.fool.com
