How Will Trump Affect the Stock Market? Valuations Flashing Warning Signs Amid Policy Uncertainty

When investors ask whether Trump will affect the stock market, the answer is complicated. Early in his current term, the President’s unconventional trade and economic policies sparked predictions of market turmoil. Yet the S&P 500 has delivered roughly 14% returns over the first year—better than its 30-year average of 10%, though trailing 2024’s exceptional 23% gain. However, beneath these healthy headline numbers lies a troubling dynamic that shouldn’t be ignored: extreme uncertainty about future policy direction, combined with historically elevated stock valuations.

The conventional worry—that Trump’s tariffs would trigger runaway inflation—has largely failed to materialize. But the real risks are far more subtle and potentially more damaging to long-term stock market performance.

Trump’s Tariff Strategy: Why the Inflation Prediction Fell Short

When the Trump administration rolled out its sweeping “Liberation Day” tariff package in spring 2025, mainstream economists predicted a significant inflation surge. The initiative imposed a 10% minimum tax on most U.S. imports, with higher rates targeting specific trading partners and product categories.

Yet inflation never spiked as anticipated. Why? Several factors worked together:

The Federal Reserve Bank of San Francisco published research showing that only 11% of U.S. consumer spending traces back to imported goods. Meanwhile, imported intermediate inputs represent just 5% of U.S. production costs. This is far smaller than the doomsayers suggested.

Additionally, companies proved nimble in response. Many shifted manufacturing and supply chain operations to nations with lower Trump administration tariffs. Others absorbed tariff costs themselves rather than passing them through immediately, prioritizing market share preservation over margin expansion.

Current data shows inflation at 2.7% as of late 2025—down from 2.9% year-over-year. Some Federal Reserve officials expect inflation to tick up to 3% during 2026 as businesses gradually pass tariff impacts to consumers, before returning toward the Fed’s 2% target in 2027.

The Real Problem: Policy Uncertainty Paralyzes Business Planning

Here’s what truly troubles investors: the unpredictability of Trump’s approach to tariffs and trade. Unlike traditional U.S. tax policy implemented through Congress and relevant agencies, these tariffs were imposed arbitrarily, without institutional checks or consistent frameworks. This creates legal and political vulnerability—there’s no guarantee they survive beyond the current administration.

American companies face a genuine dilemma. Without clarity on whether tariffs will persist, persist and expand, or eventually fade, corporate leadership has limited incentive to invest heavily in domestic manufacturing capacity to replace expensive imports. Nor does it make sense to build production facilities in overseas markets that could suddenly face new tariffs.

This policy murkiness doesn’t just constrain trade flow—it stifles capital investment and long-term business planning, which ultimately affects economic growth prospects for the stock market to price in.

The situation deteriorates further when Trump threatens additional tariffs against European nations over unrelated geopolitical disputes, such as his Greenland annexation proposal. Such brinkmanship invites retaliation targeting U.S. technology companies specifically—a sector that represents a massive portion of current market gains.

Stock Valuations Reach Levels Not Seen Since the Dot-Com Era

Yet there’s a third dimension to this story, one less directly connected to Trump but critically important: the stock market itself appears overpriced by historical measures.

The cyclically adjusted price-to-earnings ratio (CAPE) currently sits at 40.8—the highest level recorded since the early-2000s dot-com bubble. This metric divides current S&P 500 prices by inflation-adjusted average earnings over the past decade, smoothing out business-cycle noise to reveal whether stocks are reasonably valued, fairly priced, or stretched.

At 40.8, stocks are definitively stretched. Historically, CAPE ratios above 30 signal elevated risk. Levels near 40 precede significant market corrections.

AI Investment: The Invisible Hand Preventing a Reckoning

What’s currently propping up the stock market despite these red flags? Spending related to artificial intelligence infrastructure. The frenetic pace of data center buildouts, chip manufacturing expansions, and AI software development has created an investment boom that’s essentially masking underlying economic weakness and uncertainty elsewhere.

If the AI capital deployment cycle slows materially in 2026—and there are growing questions about whether such spending is sustainable or even economically rational—the market faces a reckoning. Investors will be forced to confront how Trump’s tariffs and policy uncertainty are already restraining U.S. economic growth beneath the surface.

What This Means for Investors Going Forward

The stock market’s performance under Trump has defied initial expectations. Returns have been respectable, not destructive. But robust headline gains obscure a market increasingly dependent on a single sector’s capital intensity and increasingly vulnerable to policy shocks.

For those wondering how Trump will affect the stock market over the coming year, the answer hinges on three interconnected factors:

First, will the AI investment wave sustain its current momentum, or will skepticism and budget constraints force a pullback?

Second, will Trump’s trade policies stabilize and gain legal/political certainty, or will they remain a source of endless corporate planning paralysis?

Third, at current valuations, how much bad news can the stock market realistically absorb before corrections become necessary?

Investors should approach this environment with caution. History suggests that when CAPE ratios reach levels not seen in 20+ years and when policy uncertainty reaches this intensity, patience and selectivity—rather than aggressive market participation—tend to produce better long-term outcomes.