The Trump Bull Market Will Soon Be Derailed, With This Historically Insurmountable Headwind Being the Culprit

From an investment perspective, Wall Street is a fan of Donald Trump in the White House. Stock-driven stocks mature during President Trump’s first term Dow Jones Industrial Average (DJINDICES: ^DJI)benchmark S&P 500 Index (SNPINDEX:^GSPC)and driven by innovation Nasdaq Composite Index (NASDAQ: ^IXIC) Increases of 57%, 70% and 142% respectively.

In the year and changes since he took office for his second non-consecutive term, another Trump bull rally has taken shape. From January 20, 2025, to the close of trading on February 10, 2026, the Dow Jones Index, S&P 500 Index, and Nasdaq Composite Index rose by 15%, 16%, and 18% respectively. Huge returns have become the norm.

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While there are multiple catalysts behind this unusually strong bull run, some of which can be attributed to Donald Trump, there are also headwinds that could derail the rally. One insurmountable obstacle with a history of more than 150 years deserves special attention.

Some domestic matters aside, the climb in Wall Street’s major indexes is nothing new. Since March 1897, there have been 33 presidential terms, 26 of which have produced positive returns for the Dow Jones Industrial Average or S&P 500. Most presidents have seen growing optimism about the U.S. economy and investment lead to stock market gains during their terms, and Trump is no exception.

However, President Trump’s early annualized returns in his second term were the best of any president in more than a century. As an investor, it pays to understand the reasons behind such huge returns.

Not all upside catalysts for stocks are influenced by the president. For example, the rise of artificial intelligence (AI), which began during Joe Biden’s presidency, and the emergence of quantum computing are playing a key role in boosting the broader market. Analysts at PricewaterhouseCoopers believe that artificial intelligence can add $15.7 trillion to the global economy by 2030, while the Boston Consulting Group estimates that quantum computing will create up to $850 billion in global economic value by 2040. These technologies are clearly exciting investors.

Likewise, President Trump has not intervened in the Fed’s six rate cuts since September 2024. Lower lending rates encourage businesses to borrow, which in turn leads to increased hiring, acquisition activity and capital for innovation.

But the president’s policies undoubtedly played a role in boosting the stock market. For example, the Tax Cuts and Jobs Act, his flagship tax and spending law signed into law in December 2017, permanently reduced the peak corporate marginal income tax rate from 35% to 21%. This marks the lowest corporate tax rate since 1939.

Although the purpose of lowering corporate income tax rates was to encourage hiring and innovation, the excess revenue retained by companies resulted in historic levels of stock buybacks. A more familiar sector, according to S&P Dow Jones Indices S&P GlobalCumulative buybacks by S&P 500 companies are expected to reach a record $1 trillion by 2025. Stock buybacks can increase earnings per share for public companies with stable or growing net profits, making them more attractive to value-focused investors.

While Trump’s tariff and trade policies have been controversial for the U.S. economy and Wall Street since they were announced in April 2025, it has also generated significant investment in specific businesses.

While the Trump bull market seems unstoppable, a historically accurate valuation tool offers a different story.

Make no mistake about it: every bull market needs to deal with headwinds. For example, historic disagreements within the Federal Open Market Committee threaten to turn the Federal Reserve, the nation’s most important financial institution, into a liability for the stock market.

But there’s arguably a more telling historical headwind that could pull the bottom line out of the Trump bull market — and it has to do with stock valuations.

There is no doubt that value is subjective. Since there’s no blueprint for valuing individual stocks or the broader market, a stock you think is expensive may be viewed as a bargain by other investors. The subjectivity of stock evaluation is one of the factors that makes short-term moves in the Dow, S&P 500 and Nasdaq Composite so difficult to predict.

However, one time-tested valuation tool does an excellent job of eliminating this subjectivity: the S&P 500’s Shiller price-to-earnings ratio (P/E). Sometimes you’ll see the Shiller P/E ratio referred to as the Cyclically Adjusted P/E ratio, or CAPE ratio.

Rather than taking into account earnings over the past 12 months like a traditional P/E ratio, the Shiller P/E ratio is based on the average inflation-adjusted earnings over the past 10 years. Taking into account a decade of earnings history, rather than just 12 months, ensures that recessions and other shock events (e.g., the COVID-19 pandemic) do not have a significant impact on the readings.

Although economists introduced the Shiller P/E ratio in the late 1980s, it was not backtested until January 1871. Over the past 155 years, the average multiple for this valuation measure was a modest 17.34.

However, it has spent much of the past three decades above this long-term average. The Internet has broken down more than a century of information barriers between Wall Street and Main Street, and that, coupled with lower interest rates, has encouraged retail investors to seek out growth stocks and accept more risk, including higher price-to-earnings ratios.

But as of the close on February 10, the S&P 500’s CAPE ratio was 40.36. It was the second most expensive stock market in history, behind only the dot-com bubble, which peaked in December 1999 with a Shiller P/E ratio of 44.19.

Since January 1871, the Shiller P/E ratio has exceeded 30 only six times, including this one. Following the previous five events, the Dow Jones Industrial Average, S&P 500 and/or Nasdaq Composite lost 20% to 89% in value. While the 89% peak-to-trough decline experienced by the Dow Jones during the Great Recession is unlikely to be repeated, history has amply demonstrated that extended valuations can lead to declines in stocks. final (Keyword!) Wall Street’s major indexes fell sharply.

While the CAPE ratio is not a timing tool, it has a perfect track record of signaling the end of Wall Street’s bull markets. If history repeats itself, the Trump bull market may soon be over.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions and recommendations at S&P Global. The Motley Fool has a disclosure policy.

Prediction: Trump Bull Market Will Soon Be Derailed, Historically Insurmountable Headwinds to Blame Originally Posted by Motley Fool