Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
The S&P 500 is currently on track to record its worst November performance since the Great Recession in 2008, driven by persistent concerns over the U.S. economy and elevated stock market valuations. The index has declined over 1.2% month-to-date, prompting fears among investors that a bear market could be on the horizon.
Market Performance and Historical Context
Historically, November has been a strong month for the U.S. stock market. According to Argus Research, the S&P 500 has gained an average of 2.2% in November since 1980, significantly outperforming other months.
Despite this historical trend, the current decline puts the S&P 500 on a path for a significant downturn, a situation last observed during the financial crisis of 2008.
Federal Reserve and Inflation Concerns
Investors are increasingly worried that the Federal Reserve’s Federal Open Market Committee (FOMC) may not proceed with an anticipated interest rate cut in December. This concern stems from inflation remaining stubbornly above the Fed’s 2% target.
Economists surveyed by The Wall Street Journal generally expect inflation to stay above 3% through mid-2026. While an October rate cut occurred as expected, the probability of a second cut in December has reportedly fallen to 50% from nearly 100% last month.
Impact of Trump Administration Tariffs
Economic concerns are further exacerbated by the continued effects of tariffs imposed by President Donald Trump. While the administration had previously suggested foreign exporters would bear the cost, reports indicate the White House is considering eliminating duties on certain goods, implicitly acknowledging that U.S. consumers and companies are absorbing the costs.
Goldman Sachs estimates that U.S. companies and consumers will collectively pay 77% of these tariffs by the end of 2025, with consumers alone shouldering more than 50% of the burden. These tariffs have raised the average tax on U.S. imports to levels not seen since the 1930s.
Since the most significant duties were announced on April 2, inflation has risen monthly, hiring has slowed to a pace not observed since 2010 (excluding the pandemic period), layoffs reached a 22-year high in October, and consumer sentiment is nearing a record low. A Bloomberg report noted that “Trump’s tariffs policies have both contributed to price pressures and uncertainty among businesses, undermining incentives to hire.”
S&P 500 Valuation and Bear Market Risks
Beyond current economic indicators, the S&P 500’s valuation presents another area of concern. In late October, the index’s forward price-to-earnings (P/E) multiple exceeded 23, a level reached only once before in the last 25 years.
The previous instance occurred in mid-2020, when investors underestimated the impact of the COVID-19 pandemic on global supply chains, ultimately leading to a 25% decline in the S&P 500 and a bear market. While a bear market may not manifest immediately, the current elevated valuations, coupled with a weakening economy, could precipitate a similar outcome in the coming months.
Outlook
With the government shutdown concluded, new economic data will provide further clarity. Should concerns regarding inflation and employment continue to weigh on consumer confidence, the U.S. stock market could face a bear market in the near future. Investors are advised to consider adjusting portfolios by avoiding overvalued stocks and increasing cash positions.
