The Stock Market Flashes a Warning Seen Twice in 40 Years, and the Federal Reserve Has Bad News About President Trump's Tariffs

Core Insights - The U.S. stock market, represented by the S&P 500, is experiencing a strong year with a 16% increase in 2025 despite economic uncertainties due to President Trump's tariffs [2][8] - A Federal Reserve study indicates that these tariffs will negatively impact economic growth, leading to increased unemployment and slower GDP growth [4][5] - The current valuation of the S&P 500 is at 22.4 times forward earnings, one of the highest in the past 40 years, raising concerns about future stock market performance [8] Economic Impact - The Federal Reserve Bank of San Francisco's research suggests that tariffs will reduce GDP growth by half a percentage point in 2025 and 2026, which could lead to slower corporate earnings growth [5][6] - Historical data shows a correlation between GDP growth and corporate earnings growth, indicating that slower GDP growth could adversely affect stock market performance [6][7] Market Valuation - The S&P 500's current valuation is concerning, as it has only reached similar levels during two other periods in the last 40 years, suggesting potential overvaluation [8] - Comparatively, between 2005 and 2014, nominal U.S. GDP rose by 43% while the S&P 500 achieved a total return of 110%, and between 2015 and 2024, nominal GDP rose by 67% with a total return of 243% for the S&P 500 [9]