What Changed?
The market’s biggest swings increasingly trace back to Washington, not the income statement. Tariff headlines, fiscal standoffs, and regulatory signals are showing up first in sector leadership and valuation—often before any meaningful change in reported fundamentals.
That doesn’t mean earnings are irrelevant. It means the market is treating policy as the variable that rewrites the path of future cash flows and, just as importantly, the discount rate applied to them. In that environment, “good quarter” fundamentals can coexist with jittery pricing because investors are repricing the rulebook, not the scorecard.
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The Numbers
Economic policy uncertainty (monthly): 225.13 in November 2025.
Regulation-focused uncertainty: 326.79 in October 2025 (categorical index).
Tariff-related cash flow is no longer trivial: federal customs duties receipts run at a 331.4% annualized pace (SAAR) in Q3 2025.
Valuation remains elevated versus history: FactSet puts the S&P 500 forward 12-month P/E at 22.5, above the 5-year (20.0) and 10-year (18.7) averages.
The fiscal backdrop stays a persistent risk premium: CBO projects a $1.9 trillion deficit in 2025 and debt rising to 118% of GDP by 2035.
Why It Matters
When uncertainty is policy-driven, markets tend to move on probabilities, not point estimates. Tariffs don’t just change a single quarter’s margin—they change who has pricing power, which supply chains are “safe,” and how much investors trust forward guidance. Regulation works similarly: it widens the range of outcomes for concentrated industries, which markets often express through a higher required return rather than an immediate hit to EPS.
Fiscal gridlock adds a different channel. Even without a recession narrative, persistent deficits can keep investors focused on rate sensitivity—because the path of issuance and term premia matters for equity valuations when multiples are already stretched. In practice, that makes “policy beta” feel larger than “earnings beta,” at least on a week-to-week basis.
Takeaway
Markets aren’t ignoring fundamentals—they’re discounting them through a more fragile policy frame. When the rules feel negotiable, the cleanest earnings story still has to clear a higher uncertainty hurdle.
— Lauren Brown
Editor, American Ledger
Sources
Federal Reserve Bank of St. Louis (FRED), December 2025 https://fred.stlouisfed.org/series/USEPUINDXM
Federal Reserve Bank of St. Louis (FRED), December 2025 https://fred.stlouisfed.org/series/EPUREG
Federal Reserve Bank of St. Louis (FRED), December 2025 https://fred.stlouisfed.org/series/B235RC1Q027SBEA
FactSet, December 2025 https://www.factset.com/earningsinsight
Congressional Budget Office, January 2025 https://www.cbo.gov/publication/60870