The S&P 500 (SNPINDEX: ^GSPC) 2026 has essentially traded sideways, but history says the benchmark index could fall sharply in the coming months.
Several recent studies show that President Trump’s tariffs are siphoning money from American companies and consumers, and the S&P 500 recently showed the same warning as it did during the dot-com crash in October 2000.
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Here’s what investors need to know.
President Trump has repeatedly argued that foreign exporters will pay their tariffs for the privilege of doing business in the US. He went further in an editorial published last month The Wall Street JournalClaiming that foreign companies “pay at least 80% of tariff costs”. He also cited a Harvard Business School study to back up his claim.
What’s the problem? The study Trump linked to makes no such claim. In fact, the researchers reached the opposite conclusion. “Our results suggest that US consumers bear up to 43% of the tax burden, with the rest being absorbed by US firms,” the report said.
Those results are roughly in line with research from other institutions. Goldman Sachs Economists report that US companies and consumers will collectively pay 84% of the tariffs by October 2025. And they estimate that 67% of the burden will be borne by consumers alone 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 tax burden.” The other 96% is shipped to US importers and consumers.
Trump’s tariffs are effectively a tax on consumption, meaning they reduce purchasing power for consumers and raise input costs for businesses. This is a problem because consumer spending and business investment account for about 85% of GDP. By siphoning money from consumers and businesses, tariffs threaten to slow economic growth.
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. Earlier, the S&P 500 last recorded a monthly CAPE ratio above 39. Determine whether entire stock market indices are overvalued, and multiples above 39 have historically been associated with disappointing future returns.
The table shows the best, worst, and average performance of the S&P 500 over various time periods following monthly CAPE readings above 39.
| time period | Best returns of the S&P 500 | The worst return of the S&P 500 | Average return of the S&P 500 |
|---|---|---|---|
| six months | 16% | (20%) | 0% |
| a year | 16% | (28%) | (4%) |
| two years | 8% | (43%) | (20%) |
Data source: Robert Schiller. Table by author.
As shown, after recording a monthly CAPE ratio above 39, the S&P 500 has returned an average of 0% over the next six months. But in the next year, the index decreased by an average of 4 percent and in the next two years, it decreased by an average of 20 percent.
The S&P 500 currently trades at an expensive valuation that has historically shown large losses. Such an outcome is likely more likely in the current market environment as President Trump’s tariffs threaten to slow economic growth.
Of course, past performance never guarantees future results. Investors can tolerate higher valuation multiples as artificial intelligence (AI) is likely to generate higher earnings growth in the future. In fact, S&P 500 companies reported an acceleration in earnings in 2025, and Wall Street expects another acceleration in 2026.
Therefore, investors should not sell their portfolios in anticipation of a market decline. Instead, now is a good time to sell any stock you don’t believe in. This is a good time to be more conservative when you put money in the market. Instead of 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 past 30 years, and there’s no reason to believe the next 30 years will be much different.
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Trevor Genevin has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. Motley Fool has a disclosure policy.
Stock markets sound the alarm as Wall Street gets bad news about President Trump’s tariffs. History says it will happen now. Originally published by Motley Fool
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