Market Alert: How Tariff History Warns of Stock Market Volatility Under Trump

The early months of 2025 have presented investors with a peculiar paradox. Despite widespread predictions that trade policy would derail equity markets, the S&P 500 has managed to climb roughly 14% over the first year of Trump’s term. Yet beneath this surface calm lies an unsettling dynamic: the stock market’s reaction to tariffs has confounded many expectations, and history of tariffs suggests we should prepare for a reckoning.

The Tariff Surprise: Why Inflation Fears Failed to Materialize

When President Trump announced his “Liberation Day” package of tariffs on April 2, 2025, economists across the mainstream media predicted chaos. The administration’s new minimum 10% tax on virtually all U.S. imports, coupled with higher rates on key trading partners, seemed like a recipe for runaway prices at the consumer level.

Yet reality diverged sharply from predictions.

According to Federal Reserve Bank of San Francisco data from 2019, only 11% of U.S. consumption can be directly traced to imported goods. Even more striking, intermediate inputs used in domestic production account for just 5% of production costs. This structural reality meant that blanket tariffs would have a more limited reach than headline assumptions suggested. Additionally, American businesses exhibited remarkable adaptability—many quickly shifted supply chains to countries facing lower tariff rates, while others absorbed costs to protect market share.

The result? The Bureau of Labor Statistics reported that U.S. inflation fell to 2.7% in December, down from 2.9% the previous year. While some Federal Reserve officials project inflation rising to around 3% during 2026 before returning to the Fed’s 2% target in 2027, the tariff-driven inflationary spike that economists warned about never arrived.

This chapter in tariff history mirrors an important lesson: policy effects often prove more muted than predicted when analyzed through simplistic frameworks.

Policy Uncertainty: The Real Threat Beyond the Numbers

Yet the absence of inflation doesn’t mean tariffs pose no economic risk. In fact, it represents a fundamental misunderstanding of what makes these policies dangerous.

Unlike traditional U.S. tax and trade policy, Trump’s tariffs were implemented through executive action without meaningful Congressional involvement or input from relevant government agencies. This unilateral approach leaves them standing on fragile legal and political footing. Businesses understand that these measures could vanish or transform entirely once Trump’s four-year term concludes.

This uncertainty has become the primary constraint on economic planning. American manufacturers face an impossible choice: without clarity on the tariff landscape, they lack incentive to invest heavily in domestic manufacturing capacity, nor can they confidently build production facilities in currently favored overseas markets. Every capital investment decision carries an implicit question mark.

The administration has compounded this challenge through additional policy threats, including proposed tariffs on European nations over geopolitical disagreements involving Greenland. Such escalations risk triggering European retaliation, particularly against U.S. technology companies that dominate global markets.

When businesses cannot plan with confidence, economies stagnate—regardless of whether inflation emerges.

Valuation Warning Signs Mirror the Dot-Com Era

Beyond the tariff debate lies another critical concern for equity investors, one rooted in pure valuation mathematics rather than political calculation.

The Cyclically Adjusted Price-to-Earnings (CAPE) ratio, which divides the current S&P 500 price by its inflation-adjusted average earnings over the past decade, currently stands at 40.8. This level has not appeared since the early 2000s, when the dot-com bubble reached its inflated peak.

Put simply: by this measure, the stock market is substantially overvalued.

The primary culprit appears to be spending and investment related to the artificial intelligence megatrend. A relentless buildout of data center capacity has kept equity valuations elevated despite broader economic weakness and uncertainty. Should the pace of data center expansion moderate in 2026, markets will face pressure to justify current price levels—and investors may finally confront how much damage tariff-driven uncertainty has already inflicted on underlying economic growth.

What History Suggests Could Happen Next

Examining the history of tariffs and their market consequences reveals a recurring pattern: the initial economic shock often proves less damaging than the uncertainty that follows.

During previous periods of trade conflict, markets initially absorbed the policy changes, much as we’ve seen in 2025. But as business investment decisions froze, supply chains reorganized, and confidence eroded, the cumulative drag on growth became apparent. By that point, valuations that seemed defensible during periods of optimism became difficult to justify.

The current environment presents an analogous setup. The tariff surprises have not triggered immediate inflation. S&P 500 valuations remain elevated despite these policy headwinds. Yet the data center investment that has been propping up market gains cannot expand indefinitely, and the uncertainty surrounding future trade policy grows more acute with each new policy announcement.

For investors, this convergence of high valuations, policy uncertainty, and slowing growth catalysts represents a warning signal worth heeding—one that history of tariffs and market dynamics has repeatedly confirmed.