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Yahoo
12 minutes ago
- Yahoo
Forget President Donald Trump's Tariffs! There's a Far More Sinister Worry for Wall Street.
Key Points The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have navigated their way through historical bouts of volatility in 2025. Donald Trump's tariff and trade policy has stoked inflationary fears and increased uncertainty on Wall Street. However, a historically pricey stock market implies corporate earnings quality is of the utmost importance. 10 stocks we like better than S&P 500 Index › It's been quite a memorable year for Wall Street, with the broad-based S&P 500 (SNPINDEX: ^GSPC), growth stock-propelled Nasdaq Composite (NASDAQINDEX: ^IXIC), and ageless Dow Jones Industrial Average (DJINDICES: ^DJI) navigating their way through historical bouts of volatility. For example, during a one-week stretch in April, the S&P 500 endured its fifth-biggest two-day percentage decline in 75 years, as well as logged its largest single-day point gain since its inception. The benchmark index has also delivered one of its strongest three-month returns since 1950. With the S&P 500 and Nasdaq Composite rocketing to fresh all-time highs, and the Dow Jones just a stone's throw away from surpassing its record close set in December, it would appear nothing can slow down this bona fide wealth-creating machine. But things may not be as unbreakable as they seem. While a lot of attention is currently being paid to President Donald Trump's tariff and trade policy and how it could adversely impact Wall Street, a far more sinister worry lies in wait that can act as a significant drag on stocks. President Trump's tariffs bring uncertainty and inflation to the forefront On April 2, following the close of trading, Donald Trump unveiled his long-touted tariff and trade policy. It included a sweeping 10% global tariff, as well as introduced higher "reciprocal tariff rates" on dozens of countries that have historically had adverse trade imbalances with America. The president's primary goals with his tariff and trade policy are to promote domestic manufacturing, keep American goods price-competitive with those being brought in from foreign markets, and to pad the federal government's pocketbooks with tariff revenue. Though tariff revenue is undeniably climbing, so is the level of uncertainty associated with these tariffs. One of the more prominent issues with President Trump's tariff and trade policy is there's been little follow-through or consistency. There have been two separate 90-day pauses on reciprocal tariffs with the world's No. 2 economy by gross domestic product, China, and the president has adjusted the effective date, reciprocal tariff rate, and/or goods subject to tariffs for other countries on a variety of occasions. Wall Street demands predictability, and this administration hasn't been providing it. Investors are also worried about the potential inflationary impact of the president's tariff policies. A report ("Do Import Tariffs Protect U.S. Firms?") issued in December by four New York Federal Reserve economists working for Liberty Street Economics raised a good point about the lack of clarity Trump's tariffs have offered between input and output tariffs. Output tariffs are duties placed on finished products imported into the U.S., while input tariffs are duties applied to goods used to complete a finished product domestically. Ideally, tariffs are being applied to finished products, which can allow domestic manufacturers to be more price-competitive with imported goods. However, some of Trump's tariffs are being directed at goods used to complete the manufacture of products in the U.S. Input tariffs often end up increasing domestic manufacturing costs and can drive the prevailing rate of inflation higher. The other concern, which builds on the report from the four New York Fed economists, is historical precedent. The authors examined the performance of public companies whose stock struggled when Trump's China tariffs were introduced in 2018-2019. On average, companies directly impacted by Trump's China tariffs during his first term in the Oval Office saw their sales, profits, employment, and labor productivity all decline from 2019 through 2021. While there are ample reasons to believe President Trump's tariffs are a genuine concern for stocks, a far bigger threat to upend the bull market exists. Wall Street has a serious earnings quality problem As of the closing bell on Aug. 13, the S&P 500's Shiller P/E Ratio closed at a multiple of almost 39. With the exception of the dot-com bubble and the first week of 2022, this is the third-priciest stock market in history, when back-tested 154 years. Although historical precedent portends trouble for the stock market, valuations have the ability to remain extended if companies are delivering strong earnings growth and offering analyst-topping guidance. While many of the stock market's leading businesses have made a habit out of surpassing consensus profit expectations, a dive beneath the headline figures uncovers just how poor the earnings quality truly is on Wall Street. Ideally, the companies responsible for pushing the broader market higher should be letting their operating performance do the talking. But quite a few prominent businesses have been buoyed by unsustainable and/or non-innovative income sources that partially mask their true operating performance. One of the more prominent examples of a high-flying stock with abysmal earnings quality is Tesla (NASDAQ: TSLA). This member of the "Magnificent Seven" is North America's leading electric vehicle (EV) manufacturer and a business valued at $1.1 trillion, as of this writing. Through the first half of 2025, Tesla generated $2.138 billion in pre-tax income. However, $1.649 billion (77.1%) traced back to automotive regulatory credits given to the company for free by federal governments and net interest income (interest earned on cash less interest paid on debt). President Trump's "Big, Beautiful Bill" will eliminate Tesla's automotive regulatory credits in the U.S. For a company expected to be a market leader, Tesla has been consistently reliant on income sources that have absolutely nothing to do with selling EVs and its energy generation and storage operations. To boot, earnings-per-share (EPS) estimates for future years have been falling with some level of consistency for nearly three years. It's a somewhat similar story for red-hot artificial intelligence (AI) stock Palantir Technologies (NASDAQ: PLTR). Palantir's sought-after AI-driven software-as-a-service Gotham and Foundry platforms are delivering sizzling growth, with full-year sales now projected to climb by 45% in 2025. But one of the interesting quirks about Palantir is that it generates a sizable percentage of its pre-tax income from interest earned on its cash. Though I'm not faulting Palantir for bringing in $106.7 million in interest income through the first six months of 2025, it's worth noting that this represents more than 19% of its pre-tax income. A company that's valued at a completely unjustifiable price-to-sales ratio of 135 should be doing all the talking with its operating performance. Instead, Palantir's trailing-12-month P/E ratio of more than 610 is being partially propped up by non-innovative interest income earned from its cash. Tesla and Palantir aren't unique examples -- they just happen to be some of the most prominent businesses. If earnings quality remains poor or suspect, premium valuations can easily become the stock market's downfall. Should you invest $1,000 in S&P 500 Index right now? Before you buy stock in S&P 500 Index, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and S&P 500 Index wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $663,630!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,115,695!* Now, it's worth noting Stock Advisor's total average return is 1,071% — a market-crushing outperformance compared to 185% for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of August 13, 2025 Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Tesla. The Motley Fool has a disclosure policy. Forget President Donald Trump's Tariffs! There's a Far More Sinister Worry for Wall Street. was originally published by The Motley Fool Error while retrieving data Sign in to access your portfolio Error while retrieving data Error while retrieving data Error while retrieving data Error while retrieving data
Business Insider
35 minutes ago
- Business Insider
Holding cash in case a bear market hits? Here's where and when to invest if stocks plunge.
If you've been building up a big cash reserve over the last few years, you're not alone. You're also probably not alone in wishing you'd had the money in stocks. Cash has generated meaningful yields since 2022 after the Federal Reserve went on a rate-hike spree, drawing record amounts into money market funds. The total value in money market funds — highly liquid, cash-equivalent assets that generate yield from short-term bonds — is at a record $7.3 trillion. About $2.1 trillion is held by retail investors. Even stock-investing icon Warren Buffett holds a record cash position worth nearly $350 billion as of March. But stocks have ripped higher in the meantime. The S&P 500 is up 80% since its October 2022 low. It's been difficult to know when to get into the market, though. With the stock market consistently hitting new highs and valuations historically elevated in recent years, you might have been waiting for a good opportunity to put that cash to work in equities, waiting for a dip to buy. If you missed the April plunge, you might still be doing so. It's not necessarily a bad approach. Goldman Sachs said this week that the chance of a stock-market pullback has jumped. In fact, stocks are so expensive that Vanguard said this mont that its ideal portfolio over the next 10 years is a very conservative allocation of 70% bonds and 30% stocks. The cheaper the entry point, the better the returns. But timing the market is tricky and something market pros usually advise against trying. No one knows how long a bull rally can go or how long an eventual pullback will last. That's why the best course of action is probably to dollar-cost-average, continuing to put money into the market at set intervals, whether the market is up or down. However, if you are resolved to waiting for a significant decline to enter the market, it's a good idea to have a plan set in place before that moment arrives. When and what to buy Though bear markets in recent years have been short-lived, the average bear market going back to 1932 has seen a 35.1% drawdown that lasts a year and a half, according to investment bank Stifel. So take it slow, says brokerage firm Charles Schwab. "Instead of going all in at once, one might consider buying small chunks at a time," Charles Schwab said in an August 6 post. But not too slow, said Hank Smith, the director and head of investment strategy at Haverford Trust. There's no way to tell when the bottom is in, so you want to start taking advantage of the pullback once it hits 10% correction territory, he said. It may hurt if the market ends up falling further than 10%, Smith said, but being indecisive about when to get in can result in missed opportunities. Remember the 19.9% decline in the S&P 500 from February to April? The pain was over in the blink of an eye, with the index back at all-time highs before the end of June — and the rally has been furious, with the market up 30% since April lows. So if the market does continue to drop, it's time to get even more aggressive, Smith said. "Let's say that correction morphs into a bear market of 20%, and now you're kicking yourself that you put any in at down 10%. You can't do that," Smith told Business Insider. "You have to say, 'Ok, this is another opportunity to tranche in again,' and probably with more than you did at down 10%." As for areas of the market to buy, it's difficult to know which sectors and themes will get beaten up the most. But Schwab said it's good to take a diversified approach and start buying all corners of the market. "Interestingly enough, traders can diversify their portfolios with as few as 12 stocks, targeting stocks in all major sectors," the firm said. "Although diversification doesn't eliminate the risk of experiencing investment losses, it can help increase the chances of capturing better-performing assets and avoid the risk of losing overall portfolio value to any single business, industry, or sector." Quality dividend stocks can also provide a good buffer to market losses, Merrill and Bank of America Private Bank said in a 2024 report. Smith said that economically sensitive sectors usually make for some of the best opportunities coming out of a recessionary bear market, as they dip during downturns and rebound when the economy recovers. Funds like the Fidelity MSCI Consumer Discretionary Index ETF (FDIS) and the Invesco Dorsey Wright Consumer Cyclicals Momentum ETF (PEZ) offer exposure to cyclical stocks. But he also said large-cap tech stocks are likely to drop the most because of how high their valuations are. If that's the case, it will likely be a good chance to add exposure to them, he said. "That's very common in high-growth stocks to have big sell-offs in what is a longer-term bull trend," Smith said. "That is where an investor with a lot of cash waiting for a significant decline in the market should look to."
Yahoo
an hour ago
- Yahoo
Big Tech's AI Rally Remains Strong. The Economy Can Chug Along Even Without It.
The S&P 500 and Nasdaq Composite set fresh records again, and artificial-intelligence bulls have the floor. Sign in to access your portfolio
