Is the 1987 Stock Market Scenario Happening Again?

In finance, historical patterns frequently repeat, and there are notable parallels between the equity market performance through early October 2025 and the same period in 1987. In both times, another similarity was that equity market gains occurred despite global concerns about the US's unilateral approach to reducing its trade deficit.

In 1987, these gains were suddenly and sharply reversed when investors grew increasingly anxious about the US's unilateral attempts to tackle its increasing trade deficit. The trigger for the selloff was a comment on October 17, 1987, by Treasury Secretary James Baker, suggesting that the US might devalue its currency to help reduce the trade deficit. On October 19, the first trading day after Mr. Baker's statement, the S&P 500 plummeted by 22.6%.

Last Friday, the S&P fell by 2.7%, marking the largest one-day decline since April, after President Trump threatened to impose additional tariffs on China following their announcement of new export controls on rare earth minerals and raw materials.

Over the weekend, Trump announced an additional 100% tariff on imports from China, starting in November. Today, China's Commerce Ministry stated it would not back down from President Trump's new tariff threat, emphasizing that while they do not wish to engage in a trade war, "they are not afraid of one."

What happens next is impossible to predict, but investors should be aware of the growing economic and financial risks. Numerous US industries, including automotive, technology, defense, and others, would face significant setbacks due to China's export restrictions, and the AI boom in the US could be disrupted or permanently halted. Additionally, trade between the US and China would virtually cease, as no manufacturer, importer, or retailer could bear such a substantial tariff-cost increase.

In both 1987 and 2025, investor optimism, as indicated by price-to-earnings ratios, was high, both in relative and absolute terms. In particular, in October 1987, the S&P 500 P/E ratio was 22, considerably above the historical average of 13 or 14 at that time. Likewise, in 2025, the S&P 500 P/E ratio is 30, which is also significantly higher than the recent average. High P/E ratios suggest that investors are anticipating positive economic and financial developments, rather than negative news, and definitely not a renewed escalation of a tariff war between the US and China.

The interconnectedness of economies and markets is more pronounced in 2025 than it was in 1987. Therefore, unless there is a rapid de-escalation in rhetoric between the US and China, investors should be worried about a substantial decline in risk-taking.