Consumer Fear and Tariffs: Why Powell's Stock Market Valuation Warning is More Dire Now

• Consumer Sentiment Index crashed to 50.4 in November, the second-lowest reading ever recorded, with 71% of households expecting unemployment to rise in 2026
• S&P 500 forward P/E ratio sits at 21 compared to historical average of 16, while the Shiller CAPE ratio exceeds 39, historically preceding 4% declines within one year
• Goldman Sachs data shows U.S. businesses and households bear 82% of tariff costs, threatening corporate margins and earnings growth assumptions

Federal Reserve Chair Jerome Powell's September 2025 warning about elevated stock valuations has taken on new urgency as economic conditions deteriorate. The S&P 500 trades at a forward P/E ratio of 21, well above the long-term average of 16, with the Shiller CAPE ratio exceeding 39—a level historically associated with 4% declines within one year and up to 30% drops over three years.

Consumer sentiment has collapsed to 50.4 in November, marking the second-lowest reading in history and significantly below the expected 54.2. This dramatic decline reflects widespread anxiety about jobs and prices, with 71% of households expecting unemployment to rise in 2026. The sentiment crash is particularly concerning given that consumer spending drives approximately 70% of U.S. economic activity.

Trade tariff policies have emerged as a major destabilizing factor. Goldman Sachs research shows U.S. businesses and households bear 82% of tariff costs, reigniting inflation concerns just as the Federal Reserve was gaining confidence in price stability. Manufacturing surveys indicate orders have declined for nine consecutive months, signaling deteriorating growth conditions.

Despite mounting risks, Wall Street maintains optimistic forecasts for 2026, projecting 15-20% S&P 500 gains with targets reaching 8,100. These projections assume continued AI spending will offset tariff disruptions and consumer spending will remain resilient—assumptions increasingly at odds with economic data.

The combination of rich valuations, trade uncertainty, and cratering consumer confidence has created a precarious risk profile. When similar valuation levels occurred historically, particularly with the mega-cap technology concentration now at 40% of index value (exceeding 1999 dot-com levels), subsequent returns were typically flat or negative over the following decade.

News ID

3451895

Source

24/7 Wall Street

Analyzed

5 hours ago