Tariff Drag Grows: Consumers to Bear 67% of Cost
Goldman Sachs estimates consumers will absorb 67% of tariff costs by mid-2026, as the S&P 500's CAPE ratio hits 39.9 — a level last seen during the dot-com peak.
The tariff bill is coming due, and Goldman Sachs thinks consumers will pay most of it. The bank's economists estimate that American consumers and businesses collectively absorbed 84% of tariff costs through October 2025, with consumers specifically on the hook for 67% of the burden by July 2026. Foreign exporters, the theoretical target of trade policy, are eating the rest.
This isn't an academic exercise. Consumer spending and business investment together account for roughly 85% of GDP. Every dollar diverted to tariff costs is a dollar not spent on goods, services, or capital investment. The drag is gradual enough to miss in any single data point, but cumulative enough to matter.
The Valuation Problem
The tariff headwind arrives at a particularly uncomfortable moment for equity valuations. The S&P 500 recorded a cyclically adjusted price-to-earnings ratio of 39.9 in January 2026 — a level last reached in October 2000, during the dot-com peak. Historically, the S&P 500 has declined an average of 20% over the two years following a monthly CAPE reading above 39.
That doesn't mean a crash is imminent. CAPE is a terrible timing tool. But it does mean the margin of safety is razor-thin. Any economic headwind that slows earnings growth gets amplified at these valuations, and tariffs are exactly that kind of slow-burn drag.
Who Gets Hit
The impact isn't distributed evenly. Companies with complex global supply chains — think consumer electronics, apparel, and automotive — face the most direct cost pressure. Procter & Gamble flagged a $1 billion tariff headwind in its last earnings report. Retailers are quietly raising prices, absorbing margin compression, or both.
The weakening labor market compounds the problem. If consumers face higher prices from tariffs while job growth softens, the squeeze on discretionary spending tightens from both sides. December nonfarm payrolls came in at just 50,000 — the weakest month since 2020. The January report, delayed to February 11 by the government shutdown, will be closely watched for signs of further deterioration.
The Offset
Not everything is negative. Two factors are currently limiting the tariff damage.
First, retaliation has been restrained. Despite Trump's escalation to European goods — including the Greenland tariff threats in January — most trading partners have avoided full-scale counter-tariffs. That could change, particularly if the Supreme Court's pending tariff authority ruling opens the door to broader measures.
Second, AI investment is generating genuine economic activity. Big tech's $650 billion capex commitment for 2026 supports jobs in construction, manufacturing, and engineering. The AI buildout is functioning as a partial stimulus that offsets some of the tariff drag.
What the Fed Thinks
The Fed held rates steady at 3.5%–3.75% at its January meeting, with Chair Powell signaling patience. But tariffs create a specific problem for monetary policy: they push prices higher while potentially slowing growth. That's a stagflationary dynamic that doesn't lend itself to easy rate decisions.
Markets expect the next cut won't arrive until June at the earliest. If tariff-driven inflation proves sticky, that timeline could stretch further — which means rate-sensitive sectors like housing and small-cap stocks remain under pressure.
Bottom Line
Tariffs aren't crashing the market. They're eroding its foundation. The combination of historically stretched valuations, softening employment, and a consumption tax that hits lower-income households hardest creates fragility that wouldn't be visible in any single weekly market recap. The Dow just crossed 50,000 and the S&P is back in the green for 2026. Those headlines feel reassuring. The underlying math is less so.