Investors are buzzing with excitement over the possibility of a repeat performance, especially given the impressive stock market gains during Donald Trump’s first term in the White House.
Under his leadership, the Dow Jones Industrial Average (DJINDICES: ^DJI), the benchmark S&P 500, and the growth-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) surged by 57%, 70%, and 142%, respectively.
However, while there’s much optimism surrounding President Trump’s second term, there’s also an emerging concern: he’s on track to make a troubling mark in stock market history—one that should give investors pause.
President Trump Makes Dubious Stock Market History
Out of all the U.S. presidents who have come before him, President Trump is set to inherit the priciest stock market in history.
The most common way to gauge “value” on Wall Street is by using the price-to-earnings (P/E) ratio. This metric is calculated by dividing a company’s share price by its trailing-12-month earnings per share (EPS), with a lower P/E ratio typically signifying a more attractive value.
While the P/E ratio is a useful tool for quickly assessing whether a stock is overpriced or undervalued, it can be easily influenced by short-term events that disrupt a company’s earnings. For instance, the lockdowns during the COVID-19 pandemic in 2020 made the trailing-12-month EPS for many companies unreliable.
This is where the Shiller P/E Ratio for the S&P 500 comes into play, also known as the cyclically adjusted P/E Ratio (CAPE Ratio).
The Shiller P/E ratio uses the average inflation-adjusted EPS from the past 10 years, meaning it smooths out the impact of short-term events and offers a clearer picture of long-term valuation trends. This metric has been back-tested for more than 150 years, providing a reliable way to measure stock market valuations.
As of January 17, the Shiller P/E ratio for the S&P 500 stood at 38.11. This represents the highest level for any incoming president since January 1871, the earliest point from which the Shiller P/E ratio data can be back-tested. For context, the average Shiller P/E over the past 154 years is 17.19.
The History of Premium Valuations
What makes this particularly concerning is the historical pattern of what happens when stock valuations become excessively high. Since 1871, there have been only six instances in which the Shiller P/E ratio exceeded 30 during a bull market, including the current period.
In the aftermath of the previous five occurrences, the Dow Jones, S&P 500, and/or Nasdaq Composite all experienced declines ranging from 20% to 89% in value. While the timing of these declines varied, the key takeaway is that such premium valuations are not sustainable in the long term.
Despite many of President Trump’s policies being viewed as favorable to corporate America, inheriting one of the most expensive stock markets in history could set the stage for a bear market or a short-term crash during his second term.
A Silver Lining for Investors
Although the current market conditions may sound concerning based on historical trends, there’s also reason for hope, particularly for long-term investors.
In June 2023, Bespoke Investment Group published a study comparing the duration of bear and bull markets in the S&P 500, dating back to the start of the Great Depression in 1929. Over a span of 94 years, they tracked 27 separate bear and bull markets. On average, bear markets lasted only 286 calendar days, while bull markets persisted for an average of 1,011 calendar days—about 3.5 times longer.
This data suggests that the long-term approach of holding investments through market fluctuations is a strong strategy. Additionally, every year Crestmont Research updates a dataset that tracks the 20-year rolling total returns (including dividends) of the S&P 500, going back to 1900.
Despite the S&P 500 only being officially established in 1923, Crestmont’s data uses performance data from earlier indexes to provide back-tested returns.
Out of 105 rolling 20-year periods, from 1919 to 2023, all 105 periods yielded positive total returns. This shows that buying and holding an S&P 500 index for 20 years has proven to be a successful investment 100% of the time.
Additionally, nearly 90% of these periods saw an average annual return of 6% or more, and nearly half of them produced annualized returns of at least 9%.
While President Trump’s stock market record may offer a cautionary signal in the short term, the long-term upward trajectory of equities remains clear.