Key Factors
The Dow Jones Industrial Common, S&P 500, and Nasdaq Composite rocketed increased throughout Donald Trump’s first time period, and so they simply turned in an encore efficiency within the first yr of his second time period.
Quite a few historic correlations level to a heightened chance of turbulence for the inventory market within the new yr.
Nevertheless, inventory market cycles aren’t linear, which is a strong realization for long-term buyers.
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Throughout President Donald Trump’s first time period within the White Home, the inventory market soared. When he left workplace, the mature stock-driven Dow Jones Industrial Common (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and innovation-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC) had soared by 57%, 70%, and 142%, respectively.
By means of the primary 11 months and alter of Trump’s second time period as president, he oversaw an encore efficiency. By means of the closing bell on Dec. 29, the Dow, S&P 500, and Nasdaq Composite have rallied 14%, 17%, and 22% year-to-date.
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President Trump delivering the State of the Union deal with. Picture supply: Official White Home Photograph.
Whereas historical past is sort of clear that the inventory market’s premier indexes rise in worth over multi-decade intervals, getting from Level A to B is something however a straight line. As we flip the web page to a brand new yr, a spectrum of prospects awaits Wall Avenue and buyers — considered one of which is the potential for a inventory market crash to take form underneath President Trump.
Statistically, this is among the priciest inventory market’s in historical past
The primary historic headwind has nothing to do with Donald Trump or his insurance policies. As a substitute, it has the whole lot to do with the inventory market coming into 2026 at its second priciest valuation in historical past, courting again to January 1871.
Though valuation is a subjective time period, the S&P 500’s Shiller Worth-to-Earnings (P/E) Ratio leaves little doubt in regards to the priciness of equities. The Shiller P/E can be generally known as the cyclically adjusted P/E Ratio, or CAPE Ratio.
The S&P 500’s Shiller P/E, which is predicated on common inflation-adjusted earnings over the earlier decade, has averaged a a number of of roughly 17.3 when back-tested to 1871. As of the closing bell on Dec. 29, the Shiller P/E clocked in with a a number of of 40.59. The one time a steady bull market has been pricier is within the months main as much as the bursting of the dot-com bubble, when the Shiller P/E peaked at 44.19.
S&P 500 Shiller CAPE Ratio information by YCharts.
Though the Shiller P/E would not assist predict when inventory market corrections, bear markets, or crashes may happen, it does have, up to now, a flawless monitor file of foreshadowing important draw back in Wall Avenue’s benchmark inventory index.
Spanning 155 years, the Shiller P/E has surpassed 30 on six events, together with the current. The earlier 5 situations had been all finally adopted by declines within the Dow Jones Industrial Common, S&P 500, and/or Nasdaq Composite, starting from 20% to 89%. Whereas a Nice Melancholy-esque decline of 89% within the Dow is extremely unlikely in trendy instances, we did witness the S&P 500 and Nasdaq shed 49% and 78% of their respective worth on a peak-to-trough foundation following the bursting of the dot-com bubble.
A traditionally expensive inventory market will increase the chances of a inventory market crash in 2026 underneath President Donald Trump.
Historic precedent is a critical concern for Trump’s second yr
Nevertheless, there’s extra to this story than simply the inventory market being traditionally costly. A number of historic correlations and precedents counsel that 2026 could also be a difficult yr for shares.
To start with, inventory market volatility has sometimes picked up throughout midterm election years. Primarily based on information aggregated by Carson Group’s Chief Market Strategist Ryan Detrick, the S&P 500’s peak-to-trough drawdown throughout midterm years has ranged from 4.4% to 37.6%, and averaged 17.5% since 1950. This 17.5% common correction throughout midterm years is the most important of any of the 4 years a president holds workplace.
Prepare to listen to quite a bit about this, however midterm years are likely to see their final low later within the yr and have among the largest intra-year corrections.
The excellent news? Since 1950, off these lows shares have by no means been decrease a yr later and up greater than 30% on common. pic.twitter.com/WuWr8vWCJN
— Ryan Detrick, CMT (@RyanDetrick) November 16, 2025
This should not come as a shock, as midterm elections can shake up which celebration controls Congress and make it harder for a president to implement their agenda. With Republicans holding a slender benefit within the Home of Representatives, a slight shift in voter help can result in important modifications for Congress come January 2027.
Moreover, historical past has proven that Republican presidencies and recessions go hand-in-hand.
Since 1913, 10 Republicans and 9 Democrats have held the title of U.S. president. 4 of the 9 Democrats did not have a recession start throughout their time within the Oval Workplace. In the meantime, all 10 Republicans, together with President Trump, have overseen the onset of a recession whereas in workplace. Whereas this does not assure {that a} recession will materialize throughout Trump’s second time period, or that one will happen in 2026, it is a historic precedent that is been extremely correct, spanning greater than a century.
Even President Trump’s tariff and commerce coverage foreshadows the potential for inventory market weak point within the new yr.
In December 2024, 4 New York Federal Reserve economists, writing for Liberty Avenue Economics, revealed a report (“Do Import Tariffs Defend U.S. Companies?”) that examined the impression Trump’s China tariffs, carried out in 2018 and 2019, had on companies and fairness markets. Economists discovered that public corporations immediately affected by Trump’s China tariffs endured declines in employment, labor productiveness, gross sales, and earnings from 2019 to 2021.
Whereas none of those historic correlations in any approach ensures a inventory market crash throughout Trump’s second yr, the chance of a crash seems to be increased than regular in 2026.
Picture supply: Getty Photos.
Inventory market crashes beget alternative for long-term-minded buyers
Nevertheless, the wonderful thing about historical past is that it gives perception into each declining and rising inventory markets.
As a lot as buyers could dislike elevator-down strikes within the Dow Jones Industrial Common, S&P 500, and Nasdaq Composite, these are completely regular, wholesome, and inevitable occasions. Whereas investor feelings could make the rate and size of inventory market downturns unpredictable, remember that no quantity of fiscal/financial coverage maneuvering or well-wishing can cease these occasions from occurring.
With this being stated, inventory market cycles aren’t mirror pictures of each other, which is a strong realization for long-term-minded buyers.
In June 2023, when the S&P 500 had formally bounced greater than 20% off of its 2022 bear market low and entered a brand new bull market, the researchers at Bespoke Funding Group revealed an information set on X (previously Twitter) evaluating the size of each S&P 500 bull and bear market courting again to the beginning of the Nice Melancholy.
It is official. A brand new bull market is confirmed.
The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market noticed the index fall 25.4% over 282 days.
Learn extra at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
— Bespoke (@bespokeinvest) June 8, 2023
Bespoke discovered that the typical S&P 500 bear market lasted simply 286 calendar days, equal to roughly 9.5 months, since September 1929. As compared, the everyday bull market endured 1,011 calendar days, or roughly 3.5 instances longer.
Wanting again even farther produces comparable outcomes.
Every year, the analysts at Crestmont Analysis replace an information set that calculates the rolling 20-year complete returns of the S&P 500, together with dividends, because the begin of the twentieth century. Though the S&P wasn’t formally incepted till 1923, researchers had been capable of monitor the efficiency of its parts in different main indexes courting again to 1900.
What Crestmont Analysis was capable of present is that each one 106 rolling 20-year intervals it examined (1900-1919, 1901-1920, and so forth, to 2005-2024) produced a constructive annualized complete return. In plain English, all 106 intervals would have been worthwhile had an investor, hypothetically, held an S&P 500-tracking fund for 20 years.
What these backward-looking analyses exhibit is the facility of time and optimism on Wall Avenue. Regardless of short-term directional strikes being unpredictable, historical past is sort of clear that the inventory market’s main indexes ought to be increased 20 years from now, no matter who’s president.
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Sean Williams has no place in any of the shares talked about. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure coverage.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.
