The stock market is sounding a clear warning to investors as the fallout from President Trump's trade war with China continues to rattle Wall Street. After a strong performance in 2025, the S&P 500 is now trading at one of its most expensive valuations in history - a red flag that history suggests could spell big trouble ahead.
Bad News Piles Up for the President
It's no secret that Trump's aggressive use of tariffs has been a source of economic uncertainty since he first took office. But the latest batch of data suggests the president's trade policies are starting to take a real toll on the U.S. economy - and that could spell big trouble for the stock market in 2026.
According to Reuters, U.S. manufacturing activity has now contracted for 10 consecutive months, defying Trump's promises that tariffs would revive American industry. Meanwhile, the Bureau of Labor Statistics reports that job growth slowed sharply last year, with the economy adding just 584,000 new jobs - a far cry from the president's boasts of a "booming" job market.
Perhaps most worrying of all, the Federal Reserve says consumer sentiment has plunged to its lowest level in years, a clear sign that Americans are growing increasingly anxious about the economic outlook.
History Flashes a Warning Sign
What this really means is that the very policies Trump has touted as economic triumphs are starting to backfire, and Wall Street is taking notice. The S&P 500's cyclically-adjusted price-to-earnings (CAPE) ratio recently topped 39 - a level of valuation last seen during the dot-com bubble, when the market crashed.
The bigger picture here is that when the CAPE ratio reaches these nosebleed levels, the S&P 500 has historically declined by around 4% over the following year, and 10% over the next two years. In other words, if history is any guide, Trump's trade war could be the catalyst that sends the market tumbling in 2026.
Investors would be wise to heed the alarm bells ringing on Wall Street. The president's reckless approach to trade policy may have paid short-term dividends, but the chickens could be coming home to roost in a big way for the stock market in the year ahead.