#FINANCIAL_LITERACY

Already, some companies have issued warnings. Target said Tuesday that escalating tariffs and declining consumer confidence could weigh on its profit and lead to flat sales this year. Best Buy, which sources many of its products from China and Mexico, said Americans will likely see higher prices from retailers passing on elevated import costs.

Analysts warn tariffs could dent corporate earnings, an especially critical driver of the stock rally. Goldman Sachs predicts that per-share earnings among companies in the S&P 500 could drop by roughly 1% to 2% for every 5-percentage-point increase in the U.S. tariff rate.

“You’ve got to wonder if we’re looking at this a week from now, or even a month from now, what the market response is going to be,” said Matt Stucky, chief portfolio manager of equities at Northwestern Mutual Wealth Management. “The market is not exactly cheap.”

Investors have worried for months that the lofty stock valuations could weigh on long-term returns. The S&P 500 was recently trading at 21 times its expected earnings over the next 12 months, above its 10-year average of 18 times.

For some, actions from corporate insiders, who are often viewed as market bellwethers, have signaled that U.S. stocks could be headed for trouble. JPMorgan Chase Chief Executive Jamie Dimon warned in January that economic headwinds could make it difficult for companies to justify their sky-high stock prices.

“Asset prices are kind of inflated,” Dimon told CNBC at the World Economic Forum in Davos, Switzerland. “I’m talking about the U.S. stock market. But it’s not true for stock markets around the world.”

Some corporate leaders have reduced their U.S. stockholdings. Warren Buffett’s Berkshire Hathaway plans to increase its stakes in Japanese stocks, after building up a record $321.4 billion pile of cash and Treasury bills. Mark Zuckerberg has sold more than $500 million worth of Meta’s stock this year, according to S&P Global Market Intelligence data. Meta said the stock sales are part of a prearranged trading plan. Both Zuckerberg and Amazon’s Jeff Bezos unloaded billions of dollars worth of their companies’ shares in 2024.

U.S. stocks rallied furiously in 2023 and 2024, driven by artificial-intelligence fervor and the economy’s resilience against higher interest rates. Generally robust corporate earnings growth helped propel the stock market to dozens of record highs.

In 2024, the S&P 500 outperformed the MSCI World ex USA index, which tracks the performance of developed markets, by the widest margin since 1997. Longer term, the index has averaged 16% in annual total returns since the end of 2008, above the MSCI World ex USA index’s roughly 8% return.

But the U.S. benchmark has lost some of its edge this year. Germany’s DAX index and France’s CAC 40 are up about 14% and 9%, respectively, trampling the U.S. benchmark index’s performance. Hong Kong’s Hang Seng Index has surged 19% and South Korea’s Kospi is 7% higher.

The U.S. market’s dominance over those of its peers has also faltered in recent weeks. The U.S. recently accounted for roughly 49% of the global market capitalization, according to FactSet. In January, its share was about 52%, a record in FactSet data going back to 2001.

Zehrid Osmani, a portfolio manager at Martin Currie, says his firm owns European stocks with AI exposure because of how expensive American stocks have become. He also recommends that investors buy cheaper stocks in countries like Japan and China. He is watching to see whether Trump slaps tariffs on other countries.

“Any scenario here is possible,” said Osmani.