Key Points
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The S&P 500 looks pricey based on a key valuation metric.
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The generative AI trend is helping prop up share prices, but high levels of data center infrastructure spending may be unsustainable over the long term.
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The value of the U.S. dollar dropped significantly last year.
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President Donald Trump has introduced a remarkable level of uncertainty into the global economy and financial markets. The clearest example of this involves his “Liberation Day” tariffs, through which he imposed import taxes of 10% to 50% or more on goods from nearly all of America’s trading partners for close to a year.
Those tariffs were ruled illegal by the Supreme Court last month. But over the next few months, Trump is expected to continue trying to pursue his tariff policy through other means — a situation that makes it difficult for companies to plan for the future.
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However, as worrisome as the tariff tug of war might be, it isn’t even the scariest risk factor facing the market in 2026. Here are two other reasons the market could soon experience a significant correction under Trump.
Image source: The White House.
1. AI data center spending looks unsustainable
Despite the macroeconomic uncertainty, 2025 was a surprisingly good year for stocks and, arguably, the U.S. economy as a whole. Gross domestic product (GDP) grew by a solid 2.2% while the S&P 500 rose by roughly 18%, which is significantly above its historical annualized average of around 10%.
That said, that growth wasn’t necessarily the result of broad-based gains shared by a majority of companies. The New York Times reports that the heavily AI-exposed Magnificent Seven stocks accounted for half of the index’s rise over the past three years — with chipmaker Nvidia alone responsible for a whopping 15% of the S&P 500’s total return in 2025. This trend means the stock market is overexposed to the performance of one industry, and that industry’s long-term success is far from guaranteed.
Despite the hype, generative AI remains speculative and unproven. This is demonstrated by the eye-watering losses of industry leaders like OpenAI, which is expected to burn through $14 billion this year. While pick-and-shovel providers continue to make record profits by selling chips and data center equipment, consumer-facing AI companies are struggling to turn large language models (LLMs) into viable, profitable business models.
The cyclically adjusted price-to-earnings (CAPE) ratio is a market valuation metric that compares the average price of stocks to inflation-adjusted earnings over the past 10 years to smooth out economic cycles. Right now, the CAPE ratio sits at 40 — a high it has not seen since the peak of the dot-com bubble in 2000. Meanwhile, massive data center spending could start to drag down corporate earnings as depreciation expenses pile up on the books.
It could only be a matter of time before the market becomes more skeptical about the valuations of the Magnificent Seven, leading to a correction.
2. The world is losing trust in the U.S. dollar
The value of the dollar is an often-overlooked factor that influences the stock market’s performance. U.S.-traded stocks are denominated in dollars. And when the dollar declines in value, the actual purchasing power behind the market’s headline return erodes. Trump’s policies are already significantly impacting this aspect of the U.S. economy.
According to TD Economics, the dollar index dropped by 8% in 2025, which in real terms took a big chunk out of the S&P 500’s 17.9% return for the year. The dollar’s declines were even sharper against specific currencies like the euro; the European Union’s currency gained nearly 15% against the dollar last year. The trend looks set to continue due to uncertainty about U.S. fiscal and monetary policy.
The biggest factor here is probably Trump’s pressure on the Federal Reserve to lower interest rates. Many investors see his behavior as infringing on the institution’s independence, a politicization of the central bank that could lead to damaging monetary policy decisions down the line. The pressure could worsen in 2026 as Trump seeks to bring down the government’s borrowing costs as the U.S. national deficit balloons toward a projected $1.9 trillion.
What should investors do?
Stock market crashes can be scary in the short term. But the market has always followed a pattern of boom-and-bust cycles. If history is anything to go by, it will recover from the next crash over the long term. Investors can cushion their portfolios from the impact by diversifying their holdings across numerous asset classes, which will reduce their exposure to any specific sector of the economy. Downturns are also excellent opportunities to shop for great stocks at a discount.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
