When the chapter closed on 2024, investors had every reason to cheer. Last year, the iconic Dow Jones Industrial Average(DJINDICES: ^DJI), broad-based S&P 500(SNPINDEX: ^GSPC), and growth stock-propelled Nasdaq Composite(NASDAQINDEX: ^IXIC) respectively finished higher by 13%, 23%, and 29%, with all three indexes reaching numerous record-closing highs.
Catalysts have been abundant for Wall Street, with the rise of artificial intelligence (AI), excitement surrounding stock splits, better-than-expected corporate earnings, and Donald Trump’s November victory lighting a fire under equities. During the former president’s first term in the White House, the Dow Jones, S&P 500, and Nasdaq Composite rocketed higher by 57%, 70%, and 142%, respectively.
With Trump set to make history as only the second president to serve nonconsecutive terms, the million-dollar question becomes: Can the stock market soar again with Trump at the helm?
To answer this question, let’s allow history to be our guide.
President Trump signing a bill in the Oval Office. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.
Although past performance is no guarantee of future results, Trump’s first term led to some eye-popping gains for Wall Street’s major indexes. But keep in mind that these gains were fueled by record-setting fiscal stimulus following the COVID-19 lockdowns.
Based on what Donald Trump has proposed from a policy perspective, it could be a mixed bag for stocks.
On one hand, there’s clear concern about how tariffs might impact trade relations between the U.S. and China, as well as other allies. In November, Trump pledged to implement a 25% tariff on imported goods from neighbors Canada and Mexico when he took office, with an even higher tariff of 35% for goods imported from China. The potential damage to trade relations threatens to harm the U.S. economy and may reignite the prevailing rate of inflation.
On the other hand, Donald Trump’s efforts to lower personal and corporate income tax rates and reduce regulation in select sectors and industries bode well for stocks. A return to deregulation could foster a more lucrative merger and acquisition environment.
To build on this point, share repurchases for S&P 500 companies ballooned following the passage of Trump’s flagship Tax Cuts and Jobs Act (TCJA). Whereas S&P 500 companies cumulatively repurchased $100 billion to $150 billion worth of their common stock each quarter from 2011 to 2017, this figure jumped to between $200 billion and $250 billion per quarter (save for a few quarters during the early stages of the pandemic) after the TCJA went into effect.
For businesses with steady or growing net income, buybacks can meaningfully boost earnings per share (EPS) and make a company appear more fundamentally attractive.
What could be more telling about the stock market’s chances of a repeat performance during Donald Trump’s second term is its valuation. Based on what history tells us about valuations, Trump appears more likely to oversee a bear market than another big-time move higher.
Most investors lean on the price-to-earnings (P/E) ratio as their preferred measure of value. While the P/E ratio, which divides a company’s share price into its trailing-12-month EPS, works great for mature businesses, economic shock events, such as pandemic-driven lockdowns, can make the traditional P/E ratio fairly useless.
S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically adjusted price-to-earnings ratio.
The far more comprehensive measure of value for the stock market is the S&P 500’s Shiller P/E ratio, also referred to as the cyclically adjusted P/E (CAPE) ratio. The Shiller P/E is based on average inflation-adjusted EPS over the last 10 years, which means it’s able to smooth out the earnings vacillations during shock events that make the traditional P/E relatively useless.
When Trump is inaugurated tomorrow, Jan. 20, he’ll inherit one of the priciest stock markets, spanning 154 years.
As of the closing bell on Jan. 15, the S&P 500’s Shiller P/E stood at 37.79, a stone’s throw away from its 2024 high of almost 39. It’s also more than double the average reading of 17.19 when back-tested to January 1871.
Though there are some viable reasons for higher valuation multiples over the last three decades — for example, the democratization of information, ease of access to online trading, and lower interest rates — bad things have happened to stocks anytime the Shiller P/E ratio has risen above 30.
There have been only six instances in 154 years, including the present, when the S&P 500’s Shiller P/E has surpassed 30. Following each instance, the Dow Jones, S&P 500, and/or Nasdaq Composite shed 20% to 89% of their value. While the Shiller P/E isn’t a timing tool (i.e., stocks can trade at a premium valuation for weeks, months, or even years), it eventually points to significant weakness in equities.
Image source: Getty Images.
While history would suggest it’s unlikely the stock market will repeat its stellar performance during Trump’s second term, there is a crystal-clear, unmatched correlation between time and wealth-building on Wall Street.
No matter how much investors might dislike stock market corrections and bear markets, they’re a normal and inevitable part of the investing cycle. But if you were to take a step back and look at the bigger picture, you’d be able to see the night-and-day difference between the length of these cycles.
In June 2023, with the S&P 500 confirmed to be in a new bull market — in other words, it had gained 20% from its October 2022 bear market bottom — the researchers at Bespoke Investment Group posted a data set to social media platform X where they calculated the calendar-day length of every bear and bull market in the S&P 500 since the start of the Great Depression in September 1929.
As you can see in the post above, the average bear market slide for the S&P 500 lasted just 286 calendar days (around 9.5 months), with the longest bear market clocking in at 630 calendar days. Meanwhile, the typical bull market endured roughly 3.5 times as long (1,011 calendar days), and more than half of all bull markets (14 out of 27), including the present, have lasted longer than the lengthiest bear market.
The analysts at Crestmont Research widened the lens even further by examining the rolling 20-year total returns, including dividends, of the S&P 500 dating back to the start of the 20th century. Even though the S&P didn’t exist until 1923, Crestmont was able to track the performance of its components in other indexes prior to this point to yield return data back to 1900.
Crestmont’s data set, which is updated annually, features 105 rolling 20-year timelines, with end dates of 1919 through 2023. What this data set showed was that all 105 rolling 20-year periods were decisively profitable for investors. Regardless of what events cropped up during these 20-year timelines (crashes, bear markets, wars, or a pandemic), hypothetically buying and holding an S&P 500 tracking index for 20 years has been a seemingly foolproof investment strategy.
Even if the stock market fails to recapture the glory it enjoyed during Donald Trump’s first term, history clearly points to long-term upside for equities.
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Is the Stock Market Going to Soar Under President Donald Trump (as It Did During His First Term)? Here’s What History Has to Say. was originally published by The Motley Fool
Kelly Huston is a freelance writer who covers everything from politics and health to business and parenting. She's been writing for DMG Energy News since 2018, and she's an avid reader of the site. When she's not writing, Kelly can be found spending time with her family and working out at the gym.
