Key Points
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The S&P 500 has declined in November as investors have contemplated worrisome economic data and elevated valuations.
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The U.S. manufacturing sector has contracted in eight straight months, and consumer sentiment just recorded its second worst reading in history.
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The S&P 500 recently traded at 23.1 times forward earnings, a valuation so rich it has only been seen during one other period in the last quarter-century.
The S&P 500 (SNPINDEX: ^GSPC) stumbled out of the gate in November, historically the strongest month of the year for the U.S. stock market. The index has declined 1.5% month to date as investors have received bad news about the economy and become increasingly concerned by elevated valuations, particularly where artificial intelligence stocks are concerned.
Indeed, the S&P 500 recently flashed a warning signal seen just once in the last 25 years. Here’s what you should know.
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Image source: Official White House Photo by Joyce N. Boghosian.
The U.S. manufacturing sector has contracted in eight straight months
President Trump has argued tariffs are necessary to bring manufacturing activity back to the U.S. However, the most recent ISM Manufacturing Purchasing Managers’ Index (PMI) — which measures the health of the manufacturing sector by tracking orders, production, employment, deliveries, and inventory — shows that manufacturing activity has fallen in eight consecutive months.
In fact, the most recent ISM PMI report shows a contraction across all five categories, and tariffs are driving the declines. ISM Chair Susan Spence said, “For every positive comment about new orders, there were 1.7 comments expressing concern about near-term demand, driven primarily by tariff costs and uncertainty.”
U.S. companies and consumers (not foreign exporters) are paying the tariffs
President Trump has frequently argued foreign exporters would absorb the costs of his tariffs. “Foreign nations will finally be asked to pay for the privilege of access to our market,” he remarked after unveiling his baseline and reciprocal tariff schemes at an event at the White House Rose Garden in April.
However, the situation has not played out like the president insisted. Instead, the burden has landed squarely on U.S. companies and consumers, which has pushed CPI inflation steadily higher since April. Listed below are just a few examples of how tariffs are weighing on some of the largest U.S. companies.
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Apple CEO Tim Cook reported $1.1 billion in tariff-related cost increases in the September quarter, and he expects that figure to reach $1.4 billion in the December quarter.
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Caterpillar CFO Andrew Bonfield said, “We expect the impact from incremental tariffs for 2025 to be around $1.6 billion to $1.75 billion.”
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Chipotle CFO Adam Rymer said inflation is accelerating into the mid-single-digit range due to tariffs, particularly the rising cost of beef. “Consumers are dining out less often due to concerns about the economy and inflation.”
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Ford Motor Company CFO Sherry House says tariffs will be a $1 billion headwind in 2025, and she expects a similar impact in 2026.
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O’Reilly Automotive CEO Brad Beckham said the company saw a significant increase in tariff-driven procurement costs. “We are still in the early stages of the consumer response to the ramp-up in price levels.”
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Procter & Gamble, the largest consumer packaged goods company, raised prices on one-quarter of its products to offset about $1 billion in tariff-related costs, according to CFO Andre Shulten.
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Target reported a 20% decrease in second-quarter earnings, and CFO Jim Lee attributed the vast majority of the decline to tariff-related cost increases.
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Walmart CEO Doug McMillon said, “As we replenish inventory at post-tariff price levels, we’ve continued to see our costs increase each week, which we expect will continue.”
The companies above are worth tens or even hundreds of billions of dollars. If they lack the bargaining power to force exporters to absorb tariffs, then smaller businesses do, too. And the U.S. Chamber of Commerce says 97% of U.S. importers are small businesses with less than 500 employees; those businesses account for a third of the value of imported goods.
Consequently, Goldman Sachs estimates U.S. companies and consumers will pay 77% of tariffs by the end of 2025, with consumers alone paying 50% of the price increases. As we head into the holiday season, that trend is hurting consumer sentiment, which recorded its second lowest reading in history in November, according to the University of Michigan.
The S&P 500 flashes a warning seen just one other time in the past quarter-century
In late October, the S&P 500 attained a forward price-to-earnings (PE) multiple above 23, a valuation seen during just one other period in the last quarter century. Its forward P/E ratio drifted above 23 in 2020 when the market underestimated how deeply the pandemic would disrupt global supply chains.
Supply chain disruptions eventually led to scorching inflation, which compelled the Federal Reserve to raise interest rates at their fastest pace in four decades. In turn, the S&P 500 fell into a bear market in January 2022, and the index ultimately fell 25%. A similar outcome is possible, though not guaranteed, this time.
Importantly, the S&P 500’s forward P/E ratio has already cooled to 22.4, but that is still a big premium to the five-year average of 20 times forward earnings and the 10-year average of 18.7 time forward earnings. A reversion to those averages would drag the index down 10% and 16%, respectively. Investors should mentally prepare themselves for such an outcome.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Chipotle Mexican Grill, Goldman Sachs Group, Target, and Walmart. The Motley Fool recommends the following options: short December 2025 $45 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.