2 silver linings in the stock market’s decline

Subscribe to enjoy similar stories. There are two silver linings to the current stock slump for bullish investors. When the stock market drops, investors may feel like the sky is falling.

Barring the rather extreme outcome that an economic downturn is about to emerge, however, there are always silver linings to a market pullback. The S&P 500 is down almost 9% from a record close set in February, and the decline has hit most sectors. The root causes are President Donald Trump’s 10% tariffs on China and 25% tariffs on Mexico and Canada, collectively on a few hundred billion dollars worth of goods.

That’s a low-single-digit percentage of total annual U.S. economic activity, so the additional inflation that results would only put mild strain on consumer spending. The larger question is the extent to which business investment—and hiring—will slow down as a result of the uncertainty.

The market is concerned about slowing economic growth. Combine with that with the fact that the S&P 500 came into the tariff announcements trading highly priced at 22 times aggregate expected earnings for the coming 12 months. That height left plenty of room for the index to drop, and it has.

Valuation is now at just over 20 times earnings. The multiple now reflects the risk that this year’s earnings will come in several percent lower than analysts’ current forecasts. The primary silver lining for bullish investors is that the 10-year Treasury yield has fallen to about 4.2% from a high of almost 4.8% this year.