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

• Consumer sentiment plummeted to 50.4, with 71% of households expecting unemployment to rise in 2026 as tariff costs hit businesses and consumers
• Goldman Sachs data shows U.S. businesses and households pay 82% of tariff duties, reigniting inflation concerns and squeezing corporate margins
• When the Shiller CAPE ratio exceeds 39 (as it has recently), the S&P 500 historically declines 4% in the following year and up to 30% within three years

Summary:

Federal Reserve Chair Jerome Powell's September 2025 warning about elevated stock valuations has become increasingly relevant as economic conditions deteriorate. The S&P 500's forward P/E ratio stands at 21, significantly above the 16 long-term average, with the Shiller CAPE ratio exceeding 39 - historically preceding 4% declines within a year and up to 30% over three years.

Key economic concerns have emerged since Powell's warning. Consumer Sentiment Index crashed to 50.4 in November, marking the second-lowest reading in history and far below the expected 54.2. This collapse reflects widespread fears about jobs and prices, with 71% of households expecting unemployment to rise in 2026. Consumer spending, which drives 70% of US economic activity, faces significant headwinds.

The administration's aggressive tariff policies have created substantial economic uncertainty. Goldman Sachs data shows US businesses and households pay 82% of tariff costs, reigniting inflation concerns and squeezing corporate margins. Manufacturing orders have declined for nine consecutive months, indicating deteriorating growth conditions.

Despite these warning signs, Wall Street maintains optimistic 2026 forecasts of 15-20% S&P 500 gains, with targets reaching 8,100. This disconnect assumes continued AI spending will offset tariff disruptions and resilient consumer spending despite record pessimism.

Market indices showed weakness at publication: S&P 500 (-0.25%), Dow Jones (-0.45%), Nasdaq 100 (-0.40%), and Russell 2000 (-0.63%). The combination of rich valuations, trade wars, and collapsing consumer confidence suggests Powell's caution has evolved from standard Fed warning to a more serious concern about market sustainability.