In March, the S&P 500 (^GSPC 0.63%) tumbled 9% from its peak as the Iran conflict drove oil prices to a multiyear high. The index has already recouped its losses and hit a new record high, reflecting expectations that the situation will soon be resolved. But investors may have bought the dip prematurely.
Tensions between the U.S. and Iran escalated over the weekend, when each side accused the other one of violating the temporary truce set to expire on Wednesday. Meanwhile, investors recently got bad news about President Trump’s economy at an inopportune time. The S&P 500 just flashed a warning last seen during the dot-com crash, and it hints at a drawdown.
Here are the important details.
President Donald J. Trump delivers his 2026 State of the Union address. Image source: Official White House Photo.
Consumer sentiment just hit its lowest level in history
The University of Michigan conducts a monthly consumer survey with questions that cover three broad areas: personal finances, business conditions, and buying conditions. Those surveys are used to calculate the Michigan Consumer Sentiment Index.
To date, consumer sentiment has averaged 56.6 throughout President Trump’s second term, well below the average of 93.2 during his first term. The most likely reasons consumers are gloomy are price increases and the general sense of uncertainty that has settled over the economy since Trump began imposing tariffs last year.
More concerning, consumer sentiment recorded a preliminary value of 47.6 in April 2026, the lowest reading in history, as the Iran conflict drove oil prices higher. That’s bad news for investors because consumer spending accounts for about two-thirds of GDP, making it the main engine of economic growth, and the stock market’s performance is tied to the economy.
Forecasts from the Federal Reserve Bank of Atlanta show annualized GDP growth is trending toward 1.3% in Q1 2026, well below the 10-year average of 2.7%. And consumer sentiment is still deteriorating, which means growth may slow further in the coming quarters. In turn, that could lead to lower corporate earnings that Wall Street currently anticipates, and earnings misses generally move equity prices lower.
CPI inflation just hit its highest level in nearly two years
The Iran conflict has effectively closed the Strait of Hormuz, a waterway in the Persian Gulf that serves as a key transit route for oil and liquefied natural gas. Supply chain disruptions have sent energy prices soaring. As of April 19, U.S. consumers pay an average of $4.05 per gallon of regular gasoline, a price last seen in 2022.
In March, CPI inflation hit 3.3%, the highest level since May 2024. And projections from the Federal Reserve Bank of Cleveland show inflation accelerating toward 3.6% in April, which likely rules out interest rate cuts in the coming months. That’s bad news for stocks because high interest rates make bonds looks more attractive by comparison, which tends to pull money away from equities.
The S&P 500 just flashed a warning last seen during the dot-com crash
The S&P 500 currently has a cyclically adjusted price-to-earnings (CAPE) multiple of 39.5, one of the most expensive valuations in history. In fact, apart from the past few months, the index’s monthly CAPE ratio has not been this high since the dot-com crash in late 2000.
Valuations are generally poor predictors of near-term results, but they’re often useful in identifying long-term trajectories. The following chart shows how the S&P 500’s best, worst, and average returns over different time periods following monthly CAPE readings above 39.
|
Time Period |
S&P 500’s Best Return |
S&P 500’s Worst Return |
S&P 500’s Average Return |
|---|---|---|---|
|
1 year |
16% |
(28%) |
(4%) |
|
2 years |
8% |
(43%) |
(20%) |
|
3 years |
(10%) |
(43%) |
(30%) |
Data source: Robert Shiller.
As shown, the S&P 500 has typically declined during the one-, two-, and three-year periods following monthly CAPE readings above 39. Particularly noteworthy, the index has never achieved a positive three-year return under those circumstances.
However, the CAPE ratio is a backward-looking metric based on inflation-adjusted earnings from the previous decade. Therefore, it doesn’t account for the possibility that profit margins will expand and earnings will grow more quickly in the future as artificial intelligence boosts productivity. In that scenario, the S&P 500 could keep moving higher while its CAPE ratio falls to something more tolerable.
Here’s the big picture: The S&P 500 is expensive by historical standards, and the problem is exacerbated by dismal consumer sentiment and worsening inflation, both of which could hurt corporate profits in the future. While the index trades near its record high today, the stock market still looks fragile. Investors should keep that in mind as they make decisions.