Move Over, Tariffs! If a Stock Market Crash Takes Shape Under President Donald Trump, These 2 Factors Are Likely the Cause.

From a purely statistical perspective, Wall Street is pleased with Donald Trump’s tenure in the White House.

While the stock market has experienced some of its most dramatic historical volatility under President Trump (e.g., the five-week COVID-19 crash and the one-week downturn in early April 2025), Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 Index (SNPINDEX:^GSPC)and Nasdaq Composite Index (NASDAQ: ^IXIC) During his first term, his approval ratings rose by 57%, 70%, and 142%, respectively, and since the beginning of his second non-consecutive term (which ends in late February 2026), these approval ratings have increased by 13% to 15%.

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It’s fair to say that things have looked too good for the stock market since Trump took office — which is generally concerning. Many times, when things seem too perfect for a stock, they actually are.

For example, it’s easy for investors to scapegoat President Trump’s changing tariffs and trade policies as a catalyst that could send the Dow Jones, S&P 500 and Nasdaq Composite down. Previous research by four economists at the New York Fed showed that Trump’s tariffs have had an adverse impact on U.S. businesses and listed companies.

But tariffs aren’t Wall Street’s biggest concern. While the president’s trade policies tend to dominate the headlines, there are two more sinister factors that dwarf their relevance and are more likely to trigger a potential stock market crash under Donald Trump.

Arguably the biggest problem for the stock market is the Federal Reserve.

Typically, national central banks are a stabilizing force on Wall Street. The Fed attempts to achieve its goals of maximizing employment and stabilizing prices by adjusting the federal funds target rate (the overnight lending rate among financial institutions) and through open market operations such as buying and selling U.S. Treasury securities. The 12 members of the Federal Open Market Committee (FOMC), which currently includes Federal Reserve Chairman Jerome Powell, oversee the nation’s monetary policy and are responsible for these changes.

The first issue is that we are witnessing historic divisions within the Federal Open Market Committee (FOMC). While Powell’s disapproval rating is the lowest of any Fed chair since 1978, divisions among voting members of the Federal Open Market Committee (FOMC) appear to have widened in recent months.

There has been at least one dissent in each of the past five meetings, with the October and December FOMC meetings coming in opposite directions. Although the FOMC voted in favor of a 25 basis point cut in the federal funds target rate both times, at least one member favored no rate cut, while another advocated for a more aggressive 50 basis point cut.

While monetary policy discussions among FOMC members were widely viewed as constructive, the lack of a coherent vision worried investors.

Another noteworthy issue for the Fed is that Powell’s term as Fed chairman will end on May 15. That prompted President Trump to nominate former Fed governor Kevin Warsh to replace him.

Setting aside the uncertainty over whether Warsh will have the votes needed to secure the position on the Senate Banking Committee and in the U.S. Senate, there are concerns that Warsh’s nomination could backfire on Wall Street.

Historically, Wash has been a hawk. During the financial crisis (Wash served on the Federal Open Market Committee from February 24, 2006 to March 31, 2011), he often advocated for keeping interest rates higher to prevent inflation from becoming a problem. Meanwhile, investors have largely priced in further rate cuts.

What’s more, Warsh was fiercely critical of the Fed’s balance sheet, which holds about $6.6 trillion in assets — mostly U.S. Treasuries and mortgage-backed securities (MBS). If Warsh gets his way and the central bank deleverages its balance sheet, sales of bonds and mortgage-backed securities could push up long-term yields, potentially raising borrowing costs and mortgage rates.

In 2026, the Fed is at a crossroads, and Wall Street is likely to move to cut rates as long as the country’s central bank loses credibility.

Another nefarious factor that could cause the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite to crash is stock valuations.

As a preface to the following discussion, value is inherently subjective. Since there is no one-size-fits-all approach to evaluating and valuing a company or the broader market, it is nearly impossible to predict the short-term directional movement of an individual stock or index with any long-term accuracy.

However, one time-tested valuation tool consistently cuts through this subjectivity and objectively predicts potential stock market crashes on Wall Street.

The Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), was proposed by economists in the late 1980s, but was not back-tested until January 1871. The Shiller P/E ratio differs from the popular P/E ratio in that it uses a 10-year average of inflation-adjusted earnings history, rather than just 12 months of trailing earnings. This ensures that recessions and shock events do not render the CAPE ratio useless.

Over the past 155 years, the Shiller P/E ratio has averaged just over 17.3. But since October 2025, the stock has been hovering between 39 and 41, making it the second-highest stock market in history, behind only the dot-com bubble.

To be clear, the CAPE ratio is not a timing tool and does not alert investors to the beginning of a stock market correction or crash event. However, it does have a perfect track record of heralding big losses for the Dow, S&P 500 and Nasdaq Composite.

Since 1871, the Shiller P/E ratio has topped 30 only six times during consecutive bull markets, including this one. Following the previous five, the Dow Jones, S&P 500 or Nasdaq Composite lost between 20% and 89% of their value. Among them, the S&P 500 Index and the Nasdaq Index fell 49% and 78% respectively when the Internet bubble burst, while the Dow Jones Industrial Average fell 89% during the Great Recession.

History also tells us that no bear market has ended with a Shiller P/E ratio above 27. If that holds true again, the benchmark S&P 500 is expected to fall by at least a third, while the growth-focused Nasdaq could fall even more.

While history is no guarantee of what will happen in the future, the Shiller P/E ratio has an incredibly correct track record. If so, unsustainably high stock valuations, rather than President Trump’s tariffs, are more likely to trigger a stock market crash on Wall Street.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Move over the tariffs! If the stock market crashes under President Donald Trump, these two factors could be the reason. Originally posted by The Motley Fool