Over the course of President Donald Trumps administration, the S&P 500 has risen approximately 15%, a notable advance given the considerable shifts in trade policy characterized by steep tariff impositions. These tariffs, which deviate sharply from long-standing precedents, have introduced notable complexities into the economic landscape, challenging prior assumptions about sustained growth in the wake of substantial import taxes.
Economic indicators that have surfaced during this period offer a nuanced view of the health of the U.S. economy. The unemployment rate increased from 4.0% in January 2025 to 4.6% by November of the same year, marking its highest level since September 2021. Concurrently, average monthly job additions have softened, with the U.S. economy recording an average of 55,000 new jobs per month through November 2025 — the softest pace since the Great Recession of 2009, barring pandemic-related anomalies.
Consumer confidence also reflected a marked decline, with sentiment registering the lowest annual average since records began in 1952 as tracked by the University of Michigan. These economic shifts have occurred alongside the administrations tariff policies, which have redefined U.S. trade dynamics and appear to be contributing headwinds to economic expansion despite sustaining artificial intelligence (AI) investment momentum.
The tariff environment instituted last year introduced duties between 10% and 50% on imports from numerous countries, elevating the average tax on U.S. imports to roughly 16%. This level is the highest seen since the 1930s, according to JPMorgan Chase.
President Trump articulated justifications for these tariffs with the expectation that foreign exporters would absorb cost impacts, fostering domestic job creation and manufacturing resurgence. In his words, foreign entities were "asked to pay for the privilege of access to our market," aiming to reclaim American manufacturing prowess and employment.
However, recent economic data contradicts these assertions. Reports from Goldman Sachs indicate that in October 2025, U.S. companies and consumers bore approximately 82% of the tariff costs, a share expected to remain at 75% by July 2026. Thus, foreign exporters have not effectively absorbed the added expenses.
Manufacturing activity, as measured by the Institute for Supply Management (ISM), has contracted for ten consecutive months through December 2025, highlighting deceleration in the sector rather than growth. ISM committee chair Susan Spence identified tariff-induced cost uncertainty as a significant factor, undermining claims of a manufacturing revival tied to the tariffs.
The labor market has also softened under this tariff regime. The Bureau of Labor Statistics (BLS) reported that the unemployed-to-job openings ratio rose to 1.1 in November 2025, its highest level in four years, while monthly job openings have averaged 7.4 million during the same period — the weakest since 2020. This indicates an increasingly challenging environment for job seekers.
Collectively, these indicators reveal that the tariff policies have shifted costs onto domestic businesses and consumers, coincided with manufacturing contraction, and accompanied a weakened jobs market. The combined effects could manifest as a sustained economic drag, with projections from the Tax Foundation estimating a potential GDP reduction of 0.5% over the next ten years due to the tariffs.
Amid these economic developments, market valuation metrics have drawn attention. The cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 reached 39.9 in December 2025, levels not surpassed since the dot-com bubble of October 2000. Elevations above a CAPE of 39 have been rare since 1957, occurring in only 25 months total.
Historical analysis of such CAPE levels reveals a mixed but generally cautious outlook. Data compiled by economist Robert Shiller indicates that following months with CAPE above 39 points, the S&P 500 experienced average returns close to zero in six months, a loss of 4% at one year, and a 20% decline over two years. Peak positive and negative extremes in these periods ranged widely, with worst returns reaching -43% within two years.
These figures suggest that while an immediate sharp drawdown is not assured, the elevated valuation multiple signals weaker long-term returns and increased downside risk. The trend of diminishing returns over longer horizons further underlines the warning inherent in the current valuation environment.
Investors have reason to anticipate uncertainty ahead, especially given the interplay of macroeconomic stresses from tariffs and stretched stock market valuations. While some posit that advancements in artificial intelligence could bolster corporate profit margins and overall earnings, potentially justifying higher CAPE ratios, the dampening effect of tariffs on corporate costs and consumer demand introduces counteracting pressures.
Goldman Sachs findings that most tariffs costs are borne domestically imply a dual challenge for corporate earnings: margins erode if companies absorb costs, while sales volume may contract if costs are passed along to consumers. Both outcomes undermine the earnings growth that might support elevated valuation multiples.
In this context, investor strategy should emphasize prudence. Given historical patterns and the current economic environment, limiting investment exposure to high-confidence stock ideas, divesting from underperforming or uncertain holdings, and maintaining a cash reserve could be advisable. This approach aligns with managing risk amid potential market volatility and economic headwinds shaped by both tariff impacts and valuation extremes.