Just been looking at some troubling market signals that deserve attention. The S&P 500 crushed it in 2025 with a 16% rally, marking three straight years of double-digit gains. But here's what's got me concerned heading into 2026.

Trump's tariffs are becoming a real economic drag. We're seeing manufacturing contract for nine straight months now, unemployment sitting at four-year highs, and consumer sentiment at its lowest level since 1960. Goldman Sachs data shows that U.S. consumers and companies are actually bearing 82% of the tariff burden, not foreign exporters like we were told. By mid-2026, consumers alone could be shouldering 67% of that load.

The Fed's research is pretty clear on this one too. Looking back 150 years of tariff history, higher trade barriers consistently lead to slower growth and rising unemployment. That's not exactly bullish for equities.

But here's the real alarm bell. The S&P 500 is trading at a CAPE ratio of 39.4 as of December 2025 - the most expensive valuation we've seen since the dot-com crash in 2000. That's historically extreme territory. When this metric has exceeded 39, the stock market will crash or at least face serious headwinds.

The numbers tell the story. After previous occasions when CAPE ratios hit these levels, the S&P 500 dropped an average of 4% over the following year, 20% over two years, and 30% over three years. Worse, it's never posted positive returns over a three-year stretch under these conditions.

Now, this doesn't mean the stock market will crash tomorrow. Returns following extreme valuations have ranged from plus 16% to minus 28% in year one. But the longer you stretch the timeline, the grimmer it gets. Two and three-year outlooks are genuinely concerning when you combine elevated valuations with economic headwinds from tariffs.

If you've got positions you're not totally convicted on, this feels like a good time to trim. Building a cash cushion in your portfolio also makes sense. The stock market will crash eventually - that's just how cycles work - and being positioned defensively when valuations are this stretched seems like basic risk management.

Worth keeping an eye on how tariff policy evolves. That could be the deciding factor between a correction and something more severe.