From a numbers perspective, Wall Street is booming with President Donald Trump in the White House. During his first non-consecutive term (January 20, 2017 to January 20, 2021), Dow Jones Industrial Average(DJINDICES: ^DJI)broad based S&P 500 Index(SNPINDEX:^GSPC)and growth stock dependence Nasdaq Composite Index(NASDAQ: ^IXIC) Increases of 57%, 70% and 142% respectively.
The situation has been essentially the same since Trump’s second term began on January 20, 2025. As of the close on March 2, the Dow Jones Index, S&P 500 Index and Nasdaq Composite Index were up 12%, 15% and 16% respectively.
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While most presidents have seen stocks rise during their tenures in the Oval Office, looking back more than a century, Wall Street’s major stock indexes under Trump have had the best annualized returns of any president. But at the same time, when things in the stock market look too good to be true, they often are.
President Trump delivers a speech. Image source: Official White House photo.
While plenty of catalysts may still provide support for the Trump bull market, more than 150 years of historical precedent suggests this bull market is likely to end sooner rather than later.
Before we dive into the tried-and-true headwinds that could upend the Trump bull rally, we first need to lay the groundwork for how the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite reached all-time highs.
First, not all of Wall Street’s upside catalysts are related to President Trump. For example, the rise of artificial intelligence (AI) and the advent of quantum computing are arguably the hottest stock market trends.
Analysts at PricewaterhouseCoopers believe that artificial intelligence could create $15.7 trillion in economic value globally by 2030, while the Boston Consulting Group is looking at quantum computers that could add $450 billion to $850 billion in value to the global economy by 2040. These are potentially high-ceiling markets that tend to get investors excited.
The Federal Reserve’s ongoing rate-cutting cycle has also fueled the bull rally. The FOMC’s decision to set the federal funds target rate is made independently of the president.
Target federal funds rate cap data provided by YCharts.
If the country’s central bank continues to lower interest rates, it should spur corporate borrowing, leading to increased hiring, acquisition activity and innovation capital spending. All of these factors tend to contribute to corporate earnings growth.
But some distinct elements of the rally bear the stamp of President Trump. For example, the Tax Cuts and Jobs Act, the flagship tax and spending law of Trump’s first term, permanently reduced the peak corporate marginal income tax rate from 35% to 21%, the lowest level since 1939.
Public companies retaining more earnings has led to a significant increase in the average quarterly share repurchases of S&P 500 companies. S&P Dow Jones Indices, a more familiar sector S&P GlobalIt is expected that by 2025, the cumulative amount of repurchases by S&P 500 companies will exceed US$1 trillion. For companies with stable or growing net profits, stock buybacks can boost earnings per share (EPS) and make their shares more attractive to value-seeking investors.
Image source: Getty Images.
While there are no data points or predictive indicators that can determine when the music will stop on Wall Street, some indicators and/or related events have an excellent track record of predicting decades or even more than a century into the future.
Based on historical precedent alone, none of the president’s tax and spending laws, including his seemingly ever-changing tariffs and trade policies, will be able to prevent the end of the Trump bull market – and stock valuations show why.
Valuing individual stocks or the broader market is challenging. Because there is no one-size-fits-all way to value a business or the stock market, there is often considerable disagreement about what “value” is. This is a big reason why short-term directional moves in the Dow, S&P 500 and Nasdaq Composite are so difficult to predict.
However, one valuation-based indicator with 155 years of backtesting suggests that the Trump bull market is inevitably coming to an end. Meets the Shiller price-to-earnings ratio (P/E), also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio).
The most common valuation tool, the P/E ratio, reflects the trailing 12-month earnings per share history, while the Shiller P/E ratio is based on the average inflation-adjusted earnings per share over the past 10 years. Using a broad, inflation-adjusted earnings history ensures that shock events and recessions do not meaningfully impact readings. The Shiller P/E ratio provides the closest comparison of like-for-like valuations for the S&P 500 that investors can get.
Since January 1871, the CAPE ratio has averaged 17.34, although it has been above that level for almost all of the past 30 years, largely due to lower interest rates and the Internet breaking down the information barrier between Wall Street and Main Street that had existed for more than a century.
On March 2, the Shiller P/E ratio was 40.02, and has fluctuated between 39 and 41 over the past four months. History shows that this is the second most expensive stock market, after the dot-com bubble.
History tells investors that long-term valuation premiums are unsustainable. In 155 years, CAPE has only exceeded 30 6 times, and the first 5 times ended up following important The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite all fell.
But there’s a problem with the Shiller P/E ratio: It’s not a timing tool. While it can help predict how much Wall Street’s major indexes will eventually fall – the S&P 500 is expected to drop at least 33% from its highs – it doesn’t provide any clues as to the precise timeline for when a stock market correction, bear market or crash will develop.
Still, this valuation tool has a perfect track record for signaling eventual trouble on Wall Street. Historical precedent doesn’t mince words: Trump’s bull run is numbered.
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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: The Trump bull market is coming to an end — and more than 150 years of historical precedent explains why Originally published by The Motley Fool
