Politics can have indirect and hard-to-measure impacts on the stock market. Despite concerns about President Donald Trump’s unconventional economic and trade policies causing issues for the U.S. economy, the S&P 500 saw a 14% increase in his first 12 months in office, outperforming its 30-year average annualized return of 10% but falling short of its 23% gain in 2024.
While Trump’s policies haven’t had as negative an effect on equity performance as some predicted, the uncertainty he brings to the market could still pose a threat. His ongoing trade wars and tariffs could continue to influence the stock market in 2026, with one key equity valuation metric signaling a warning not seen since the dot-com bubble.
Trump’s tariffs did not lead to significant inflation
In 2025, the Trump administration imposed tariffs that many believed would result in a surge of inflation. However, only a small percentage of U.S. consumption is directly tied to imports, and businesses were able to adjust their supply chains to mitigate some of the impact. While the U.S. inflation rate dropped to 2.7% in December, some expect it to rise to 3% in 2026 before stabilizing around the Federal Reserve’s target of 2% in 2027.
Other concerns to consider
Investors should view tariffs more as sales taxes on a small portion of U.S. consumption rather than significant drivers of inflation. The uncertainty surrounding Trump’s trade policies, implemented without congressional input, creates challenges for American businesses looking to make strategic decisions. Additionally, the president’s unpredictable actions, such as threatening European countries with tariffs over Greenland, could further disrupt markets.
The stock market signals caution
The cyclically adjusted price-to-earnings (CAPE) ratio, a key market valuation tool, currently stands at 40.8, a level not seen since the dot-com bubble. This suggests that stocks may be overvalued. The reliance on spending related to artificial intelligence could be masking underlying economic weaknesses, and a potential slowdown in this sector could reveal the true impact of Trump’s policies on U.S. economic growth.
