this S&P 500 Index(SNPINDEX:^GSPC) 2026 is largely trading sideways, but history suggests the benchmark index could fall sharply in the coming months.
Several recent studies have shown that President Trump’s tariffs are sucking money away from American companies and consumers, and the S&P 500 just issued its last warning during the dot-com crash in October 2000.
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Here’s what investors should know.
Photo credit: Official White House photo by Andrea Hanks.
President Trump has repeatedly argued that foreign exporters will pay tariffs for the privilege of doing business in the United States. He elaborated further in an editorial published last month wall street journalclaiming that foreign companies “pay at least 80% of the tariff costs.” He even cited a Harvard Business School study to back up his claim.
Any questions? The study Trump linked to makes no such claim. In fact, researchers came to the opposite conclusion. “Our results indicate that U.S. consumers pay up to 43% of the tariff burden, with U.S. businesses bearing the remainder,” the report states.
These results are generally consistent with studies from other institutions. Goldman Sachs Economists report that U.S. businesses and consumers will pay a combined 84% in tariffs through October 2025. They estimate that by July 2026, consumers alone will bear 67% of the burden.
Similarly, the Keele Institute examined shipments totaling $4 trillion between January 2024 and November 2025, and the researchers concluded that “foreign exporters bear only about 4% of the tariff burden.” The remaining 96% is passed on to U.S. importers and consumers.
Trump’s tariffs are effectively taxes on consumption, meaning they reduce consumers’ purchasing power and raise input costs for businesses. This is a problem because consumer spending and business investment account for about 85% of GDP. Tariffs suck money away from consumers and businesses, potentially slowing economic growth.
In January 2026, the S&P 500’s average cyclically adjusted price-to-earnings ratio (CAPE) was 39.9, the fourth consecutive month above 39. Prior to this, the last time the S&P 500 recorded a monthly CAPE of over 39 was in October 2000 during the dot-com bubble. The CAPE ratio is used to determine whether an entire stock market index is overvalued, with multiples above 39 historically associated with dismal future returns.
This table shows the best, worst and average performance of the S&P 500 over various periods following a monthly CAPE reading above 39.
As the chart shows, after a monthly CAPE ratio exceeds 39, the S&P 500 returns an average of 0% over the next six months. But the index fell by an average of 4% over the next year and by an average of 20% over the next two years.
The S&P 500 currently trades at expensive valuations, which, historically, portends steep losses. Such an outcome is arguably more likely in the current market environment, as President Trump’s tariffs could slow economic growth.
Of course, past performance is never a guarantee of future results. Investors may tolerate higher valuation multiples as artificial intelligence (AI) is likely to drive higher earnings growth in the future. In fact, S&P 500 earnings will accelerate in 2025, and Wall Street expects them to accelerate again in 2026.
Therefore, investors should not sell their portfolios in anticipation of a market decline. Conversely, now is a good time to sell any stocks in which you lack confidence. This is also a good time to be more conservative when putting your money into the markets. Rather than investing every dollar, consider building a cash position in your portfolio.
Most importantly, focus on creating wealth over the long term rather than dealing with short-term fluctuations. Over the past 30 years, the S&P 500 has returned 10.2% annually, and there’s no reason to believe that the next 30 years will be much different.
Before buying S&P 500 stocks, consider the following factors:
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool works for and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
Wall Street received bad news about President Trump’s tariffs, and the stock market sounded the alarm. History shows this will happen. Originally posted by The Motley Fool
