Is President Donald Trump's Tariff and Trade Policy Setting Wall Street Up for a Stock Market Crash in 2026? A Comprehensive Analysis Weighs In.

Core Insights - The report by New York Federal Reserve economists indicates that President Trump's China tariffs from 2018-2019 had lasting negative impacts on U.S. businesses, particularly those exposed to these tariffs [1][8][7] Group 1: Tariff Policy and Economic Impact - Trump's tariff policy aimed to enhance the competitiveness of American-made products and protect U.S. jobs by encouraging domestic manufacturing [2][3] - The analysis revealed that companies affected by the tariffs experienced average declines of 2.2% in labor productivity, 3.9% in employment, 6.7% in sales, and 12.9% in profits from 2019 to 2021 [8] - Input tariffs on essential goods like copper and steel have increased domestic production costs, which are then passed on to consumers, further straining U.S. firms [9] Group 2: Stock Market Performance - The stock market has shown significant gains during Trump's presidency, with the Dow and S&P 500 increasing by 57% and 70%, respectively, and the Nasdaq rising by 142% during his first term [5] - As of December 11, 2025, major indexes like the Dow, S&P 500, and Nasdaq have rallied 14%, 17%, and 22% year-to-date, reaching record highs [6] - Despite these gains, the analysis suggests that high stock valuations combined with the effects of tariffs could lead to challenges for Wall Street in the future [7][17] Group 3: Valuation Concerns - The S&P 500's Shiller P/E Ratio, a more reliable valuation metric, was reported at 40.67 as of December 11, 2025, significantly above the historical average of 17.3 [15] - Historical data indicates that when the Shiller P/E exceeds 30, significant declines in stock values have followed, with past instances resulting in losses between 20% to 89% [16] - The potential for Trump's tariffs to negatively impact corporate sales and profits could exacerbate the situation, making it difficult to sustain premium valuations [17][18]