Volatility in the U.S. stock market has been notably high over the past year. The S&P 500 ( ^GSPC 0.21%) fell 10.5% within a two-day span after President Trump declared his "Liberation Day" tariffs in early April, marking the index’s fifth-largest two-day drop ever. Ultimately, the index lost 19% from its peak as economists cautioned about potentially dire outcomes.
Despite this, the S&P 500 quickly recovered when the president delayed the harshest tariffs for three months, and continued to climb as businesses posted stronger-than-expected earnings and economic indicators stayed positive. Since the sharp fall in April, the S&P 500 has gained 30%.
However, recent downward revisions to jobs data that initially pointed to economic strength now indicate the outlook is more troubling than first believed. On top of that, investors are facing another significant concern: the S&P 500 is currently trading at a historically high valuation.
Image source: Official White House Photo.
Tariffs have fueled uncertainty, sharply slowing jobs growth
Each month, the Bureau of Labor Statistics (BLS) surveys 121,000 companies to gather information on employment and wages. The nonfarm payrolls report is especially significant, as it tracks the number of paid employees outside the farming sector, providing a snapshot of the nation’s economic health.
Initially, the BLS reported that the U.S. added 286,000 jobs across May and June, but later revised this figure down drastically to 33,000. President Trump, without offering proof, alleged that the numbers were manipulated to harm his and the Republican Party’s image. He removed BLS Commissioner Erika McEntarfer from her post, a move several economists warned could undermine public trust in future economic reports.
The latest nonfarm payrolls release brought even more disappointing results. From May through August, U.S. employers added an average of 27,000 jobs per month—a steep decline from the 123,000 monthly average between January and April. Outside of the pandemic period, hiring hasn't slowed this much since 2010, when the country was still bouncing back from the Great Recession.
In summary: Although President Trump credits tariffs for a booming economy, sluggish job creation tells a different story. The continual changes in trade policy have created an unpredictable environment, making companies reluctant to expand their workforce. This uncertainty slows business growth, reduces consumer spending power, and ultimately puts the broader economy—and the stock market—at risk.
The S&P 500 is priced well above historical norms
Tariffs aside, investors face another pressing issue. The S&P 500’s current forward price-to-earnings ratio stands at 22.1, which is notably above the five-year average of 19.9 and the 10-year average of 18.5.
Such elevated valuations are extremely uncommon. Other than now, the S&P 500 has only traded at a forward P/E above 22 during two previous periods: the late-1990s dot-com bubble and the early 2020s Covid-19 surge. Both times ended with a market crash.
Alternatively, the S&P 500’s cyclically adjusted price-to-earnings (CAPE) ratio is now at 37.9, higher than both its five-year average of 33.4 and ten-year average of 31.3. This measure—which averages inflation-adjusted profits over the past decade to smooth out business cycle swings—reveals we are nearing the second most expensive stock market in history. This is especially concerning since it’s happening alongside tariff-linked weakness in the labor market.
Bottom line: Investors should approach the current stock market with caution. While the S&P 500 keeps shattering records, most Wall Street experts expect little further upside for the rest of 2025, and historical trends suggest today’s valuations aren’t sustainable long-term. Eventually, something will disrupt the current optimism, likely resulting in a significant market downturn.
