Although Wall Street is a bona fide wealth-building machine, the stock market wouldn't be a "market" without the ability for equities to move in both directions.

Over the last month, the Dow Jones Industrial Average (^DJI 0.75%), S&P 500 (^GSPC 0.58%), and Nasdaq Composite (^IXIC 0.55%) have endured historic bouts of volatility. For instance, the S&P 500 recorded its fifth-largest two-day percentage decline on record (-10.5%) on April 3 and April 4, then turned around to register its largest single-session point gain since its inception on April 9. The Dow Jones and Nasdaq Composite also logged their respective biggest nominal point gains in history on April 9.

Wall Street's whiplash has primarily been blamed on President Donald Trump's tariff policy. While there's no denying that short-lived fear and uncertainty have resulted from various aspects of the president's tariff plans, there's a far bigger worry for the stock market than tariffs.

Image source: Getty Images.

President Trump's tariff plans lead to short-term jitters and uncertainty

For the moment, all eyes are on Donald Trump and his administration. This follows Trump's "Liberation Day" announcement on April 2, which implemented a 10% global tariff, as well as introduced higher "reciprocal tariffs" on dozens of countries that have historically run trade deficits with the U.S. Trump has since placed a 90-day pause on reciprocal tariffs for all countries except China (as of April 9).

On paper, tariffs are relatively cut-and-dried. They're put in place to protect domestic jobs and help make American goods more price competitive. For example, if foreign automakers have to pay an added duty on their vehicles sold in the U.S., Americans might be more likely to purchase American-made vehicles.

But not everything that's laid out on paper translates into the real world.

For one, tariffs run the risk of straining or worsening trade relations with our allies and other key partners, such as China. Other countries may respond with retaliatory tariffs of their own, or foreign consumers/businesses may opt not to buy American-made goods.

Additionally, Trump's tariffs have the potential to reignite the prevailing rate of inflation, which has fallen from a peak of more than 9% in 2022 to less than 3% currently. The Trump administration isn't paying close attention to the difference between output and input tariffs. Whereas the former is a duty placed on a finished product imported into the U.S., the latter is placed on a good used to complete a finished product domestically. Input tariffs can make American products more expensive and less price-competitive with those being brought in from overseas.

Investors also aren't happy with President Trump regularly changing which products are subject to tariffs, which countries are paying tariffs, and what those tariff rates are. There's been no consistent message or game plan from the administration, which is fueling the short-term jitters and uncertainty we're witnessing on Wall Street.

Image source: Getty Images.

Wall Street has a far bigger problem: Earnings quality

Though investors are seemingly waiting on the edge of their seat for tariff news, this is likely to be a short-term issue, as it was in 2018-2019 when Trump instituted tariffs on China. Beyond Trump's tariffs lies a true headwind and test of the stock market's character -- its earnings quality.

While emotions can whipsaw equities over short periods, the ability for companies to grow their sales and profits over time is what ultimately determines if valuations climb. Although many of Wall Street's most-influential businesses appear to be healthy and moving their earnings per share (EPS) needle in the right direction, a deeper dive shows that some of Wall Street's most-important businesses have an earnings problem.

For instance, Tesla (TSLA 2.06%) is commonly viewed as a fast-growing electric-vehicle (EV) manufacturer that's wisely riding its first-mover advantages. It's been profitable for five consecutive years and is the midst of ramping up its ancillary operations, including energy generation and storage, which will help to diversify its revenue stream.

But it's also a company that's been consistently generating a higher percentage of its pre-tax income from unsustainable sources, such as regulatory tax credits and interest income earned on its cash. In fact, Tesla would have announced a pre-tax loss for the first quarter without the aid of $595 million in automotive regulatory credits, which are given to it for free by governments. A former trillion-dollar company shouldn't be this reliant on unsustainable income sources.

It's somewhat of a similar story for Apple (AAPL 0.60%), which has spent quite a bit of time atop the pedestal as Wall Street's most-valuable company by market cap. Apple is a consumer favorite, and its push to become a services-oriented business, which is being overseen by CEO Tim Cook, is working out nicely.

Yet in spite of Apple's rich history, its collective growth engine, which includes the sale of its physical products (iPhone, Mac, and iPad), has stalled. Thanks to its market-leading share repurchase program, which helps to support or lift its EPS, Apple has been able to sweep this underperformance under the rug. But digging below the surface, investors will find that Apple's net income has declined from $99.8 billion in fiscal 2022 (ended in late September) to $93.7 billion in fiscal 2024.

Even Wall Street's newest artificial intelligence (AI) darling Palantir Technologies (PLTR 1.22%) can't escape the finger-pointing. On the surface, Palantir has made the push to recurring profitability and is sustaining a double-digit growth rate, largely due to the multi-year contracts its AI-driven Gotham platform has signed with the U.S. government.

Despite its eye-popping growth rate and cutting-edge AI ties, Palantir generates a sizable percentage of its pre-tax income from interest earned on its more than $5.2 billion in cash, cash equivalents, and marketable securities -- $196.8 million out of $489.2 million in 2024. Palantir netting 40% of its pre-tax income from a noninnovative source (interest income) when it's valued at a whopping 96 times sales isn't sustainable.

Earnings quality is a serious issue considering the stock market entered 2025 at its third-priciest valuation when back-tested 154 years. The S&P 500's Shiller price-to-earnings (P/E) Ratio, which you may also see referred to as the cyclically adjusted P/E Ratio (CAPE Ratio), almost hit 39 in December 2024. For context, the average Shiller P/E Ratio since January 1871 is 17.23.

The five previous instances where the S&P 500's Shiller P/E topped 30 were all eventually followed by declines of at least 20% in the Dow, S&P 500, and/or Nasdaq Composite. Premium valuations aren't tolerated over the long run, which makes earnings quality all the more important with the market at a historically expensive multiple.

Unless America's most-influential businesses begin delivering where it counts, there will be bigger fish to fry than tariffs.