The US stock market is on a sustained bull run, fuelled by advances in AI and autonomous technology. Over the last two years, the S&P 500 has gained more than 60 per cent, with investor enthusiasm over Donald Trump’s election victory continuing to push stocks higher. But the stock market isn’t a one-way street, it rises and falls over time – historically always trending upwards – but not always smoothly or without setbacks. While many investors remain positive about US stocks, some analysts think there may be warning signs of trouble ahead.

The stock market shows a rare warning sign

While US stocks continue their record-beating rally, some analysts think there could be warning signs beneath the surface. In a recent article for The Motley Fool, Sean Williams argued that the stock market is currently behaving in a way which has historically precipitated a fall.

Williams noted that the S&P 500’s Shiller price-to-earnings ratio exceeded 38 when trading closed on Wednesday, November 13, when it reached 38.18. As Williams points out, the Shiller P/E has only reached 38 on three occasions during a rally in 153 years. Those occasions were in December 1999, in the midst of the dotcom boom and at the very beginning of 2022.

Williams claims that the Shiller P/E indicator has a ‘flawless track record’ of foreshadowing major stock market events, writing that:

“Based on what history tells us, at some point in the not-too-distant future, we’re going to see a pretty sizable move lower in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. But if you’re a long-term investor looking to the horizon, history has a message for you, as well: Perspective changes everything.

“Over shorter time frames, predicting what the U.S. economy or stock market will do can be tricky, if not downright impossible. For example, recessions are a normal and inevitable part of the economic cycle. No matter how much we cross our fingers and think good thoughts, economic contractions are eventually going to occur.

“But here’s the thing about recessions: They’re short-lived. If you take a step back and look at the bigger picture, you’ll see that nine out of 12 recessions following World War II resolved in less than a year, while the remaining three failed to surpass 18 months in length.”

In a September report, when the Shiller P/E was only at 35, A J Bell said the figure should be of concern to investors – and that it may precede price volatility. Investment Director Russ Mould said at the time:

“It may therefore be of some concern that US equities currently trade on 35 times earnings according to the Shiller research. The Shiller PE has never been an exact timing tool, and uninverted yield curves have thrown out the occasional false signal too, notably in mid-1982 and late 1990.

“But it would be no shock to see further share price volatility in the US, especially if markets’ preferred scenario of a cooling in inflation, a soft economic landing and interest rate cuts does not develop precisely as expected.”

However, some analysts question the interpretative value of the Shiller P/E, also known as CAPE, and don’t consider it to be a useful forecasting tool. One critic of the method is equity portfolio manager Eric Beyrich, who recently said it was a ‘backwards-looking’ measure which failed to account for future earnings, in comments to Fortune.

Could tariffs cool down the global economy?

While some observers believe President-Elect Donald Trump’s plans to slap tariffs on a number of imports into the US will be good for US companies, others think they could spark a global economic slowdown which may rebound on America.

The American investor Jim Rogers has been among those loudly complaining about the potential economic fallout of tariffs. He has reportedly said that the trade barriers could rekindle inflation if higher prices are passed on to consumers and that they could disrupt global supply chains. Speaking to Wealthion, Rogers warned that ‘things are going to go bad soon.’ In a November interview, he said:

“Nearly every stock market in the world has had an all-time high, or near an all-time high…somebody better look out the window and get worried.

“I’ve been around long enough, or have read enough to know that when everybody is making a lot of money and piling in, it usually means things are going to go bad soon.”

The Tax Foundation, a Washington D.C-based think tank which has variously been described as ‘nonpartisan’ and ‘business friendly’ asked twelve macroeconomic analysts to assess the potential impacts of Trump’s proposed tariffs. Their findings were that the trade barriers would hurt the US economy. In a November report, they wrote:

“President-elect Trump may want to impose tariffs to encourage investment and work, but his strategy will backfire. Tariffs will certainly create benefits for protected industries, but those benefits come at the expense of consumers and other industries throughout the economy.”

The London School of Economics has also modelled the potential impact of Trump’s proposed tariffs and while their analysis showed a reduction in US GDP, they said the big losers would be China. In an October report, they found that:

“The largest adverse effect of Donald Trump’s trade policies would be to China’s economy, with a projected loss of 0.68 per cent of GDP. There would be limited impacts across the European Union but potentially substantial challenges for some Member States.

Germany (-0.23 per cent) faces a GDP drop more than twice as large as that for the European Union as a whole, while France and Italy would both sustain small impacts (-0.15 per cent and 0.01 per cent). The UK would suffer impacts (-0.14 per cent) closer to the European average.”

Advocates of tariffs point out that countries such as China have been leveraging what are seen as unfair trading practices, including subsidising their own products and even selling them at a loss to put foreign competition out of business. China has long been accused of dumping steel into the global market and is now seen to be extending the practice to finished goods, including EVs, solar panels and wind turbines.

Those in favour of disincentivising imports into the USA from China and other countries which exploit anti-competitive practices point out that trade barriers would protect strategic US industries, maintain high-skilled and high-paid jobs, and increase productivity in the economy. However, whether these potential benefits or the forecast turbulence emerge as the resulting story of a fresh wave of tariffs remains unclear.

The bull run looks set to continue into 2025

While some analysts have raised concern over an impending bear, and others point to fears over the potential impact of trade wars and tariffs, the consensus opinion is that the stock market bull run has plenty of road left to run. Forecasts expect the S&P 500 to climb in 2025, as investors believe the incoming President’s plans to deregulate the economy and slash taxes will spur economic growth. While there are concerns over resurgent inflation, investor sentiment remains largely positive. However, what goes up must come down, and it’s always prudent to pay heed to warnings, even when they may be the minority opinion.

As history shows, market corrections and economic contractions are inevitable. However, they are often short-lived and pave the way for renewed growth. For investors, the key takeaway is to maintain a long-term perspective, focusing on diversified portfolios and fundamental investment strategies. While no single indicator or policy decision can dictate the future, vigilance and adaptability will be critical as markets navigate the complexities ahead. Whether the current bull run ends in a soft landing or a steeper correction remains to be seen, but history assures us that resilience and patience are essential in the ever-fluctuating world of investing. Always seek professional advice before making any investment decision.