The S&P 500(SNPINDEX: ^GSPC) has essentially traded sideways in 2026, but history says the benchmark could fall sharply in the coming months.
Several recent studies show that President Trump’s tariffs are taking money away from American businesses and consumers, and the S&P 500 just issued a warning last seen during the October 2000 dot-com crash.
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Here’s what investors should know.
Image Source: Official White House Photo by Andrea Hanks.
President Trump has repeatedly claimed 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 Journalclaiming that foreign companies “pay at least 80% of tariff costs”. He even linked to a Harvard Business School study to back up his claim.
What is the problem? The Trump study made no such claim. In fact, researchers have come to the opposite conclusion. The report states: “Our findings suggest that US consumers paid up to 43% of the tariff burden, with the rest being absorbed by US firms.”
These results roughly align with research from other institutions. Goldman Sachs Economists report that American businesses and consumers collectively paid 84 percent of the tariffs in October 2025. And they estimate that consumers alone will bear 67 percent of the burden by July 2026.
Similarly, the Kiel Institute examined shipments totaling $4 trillion between January 2024 and November 2025, and researchers concluded, “Foreign exporters absorb only about 4 percent of the tariff burden.” The other 96% is passed on to US importers and consumers.
Trump’s tariffs are effectively a tax on consumption, meaning they reduce purchasing power for consumers and increase input costs for businesses. This is a problem because consumer spending and business investment account for about 85% of GDP. By siphoning money away from consumers and businesses, tariffs threaten to slow economic growth.
The S&P 500 posted a cyclically adjusted average price-to-earnings (CAPE) ratio of 39.9 in January 2026, marking its fourth consecutive monthly reading above 39. Before that, the S&P 500 last posted a monthly CAPE ratio above 39 during the dot-com crash. overvalued, and multiples above 39 have historically correlated with dismal future returns.
The table shows the best, worst, and average performance of the S&P 500 over various time periods after a monthly CAPE reading above 39.
Time period
The best return of the S&P 500
The S&P 500’s worst performance
The average return of the S&P 500
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 of over 39, the S&P 500 returned an average of 0% over the next six months. But the index fell an average of 4% the following year and fell an average of 20% over the next two years.
The S&P 500 is currently trading at an expensive valuation, which has foreshadowed steep losses in the past. Such an outcome is perhaps more likely in the current market environment as President Trump’s tariffs threaten to slow economic growth.
Of course, past performance is never a guarantee of future results. Investors can 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 earnings acceleration in 2025, and Wall Street expects another acceleration in 2026.
So, investors should not sell their portfolios in anticipation of a market decline. Instead, now is a good time to sell any stocks in which you have no conviction. It’s also a good time to be more conservative when putting money into the market. Instead of investing every dollar, consider building a cash position in your portfolio.
Above all, focus on long-term wealth creation rather than navigating short-term volatility. The S&P 500 has returned 10.2% annually over the past 30 years, and there’s no reason to think the next 30 years will be much different.
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The stock market is sounding the alarm as Wall Street receives bad news about President Trump’s tariffs. History says this will continue to happen. was originally published by The Motley Fool
