Stock Market Returns Will Achieve a Level Not Witnessed in 20 Years Under President Donald Trump

Afterward, this figure jumped to $200 billion to $250 billion in most quarters. Buyback activity can improve earnings per share (EPS) and make stocks more fundamentally attractive to investors.

There’s also the belief that the Trump administration will foster deregulation. By moving to minimize regulatory oversight, the red carpet will be rolled out for an increase in merger and acquisition activity.

During President Barack Obama’s eight years in office, as well as the combined eight years of President Trump’s and Joe Biden’s tenure in the White House, the stock market delivered decisively positive returns. Based on the catalysts listed above, Wall Street is expecting more gains when Trump leaves office in January 2029.

However, there’s a big reason to believe President Trump may oversee the first decline in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite since George W. Bush’s second term, which ended in January 2009. In other words, we would witness the first negative stock market returns for a presidential term in 20 years.

To be abundantly clear (note the italics, because this is an important point), the potential for stocks to head lower over the next four years has nothing specific to do with President Trump’s policy proposals. In fact, the catalyst that could send stocks notably lower awaited whichever candidate won the 2024 election.

The biggest concern for Wall Street during Trump’s presidency is that the stock market is historically pricey — and there’s simply no quick fix for extended valuations.

Though there are a number of ways to measure “value” on Wall Street, the S&P 500’s Shiller price-to-earnings ratio (P/E) does the most comprehensive job. The Shiller P/E ratio is also commonly known as the cyclically adjusted P/E ratio, or CAPE Ratio.

Unlike the traditional P/E ratio that relies on trailing-12-month EPS to decipher if a stock is cheap or pricey relative to its peers and/or the broader market, the Shiller P/E is based on average inflation-adjusted EPS over the prior 10 years. Analyzing 10 years’ worth of earnings history ensures that shock events can’t skew the calculation.

As of the closing bell on Jan. 22, the S&P 500’s Shiller P/E stood at 38.69, which is just shy of its high during the current bull market rally. It’s also more than double the average reading of 17.19, when back-tested to January 1871.

Although the Shiller P/E isn’t a timing tool, it does have a flawless track record of eventually foreshadowing bear markets for Wall Street. Spanning 154 years, there have been only six instances where the Shiller P/E has surpassed 30 during a bull market rally, including the present. Following the prior five occurrences, the Dow Jones and/or S&P 500 shed at least 20% of their value, if not considerably more.

History would suggest there’s a realistic chance of the Dow Jones, S&P 500, and Nasdaq Composite ending in the red when President Donald Trump’s second term is over.

While the prospect of the stock market going nowhere or ending lower over the next four years might not sit well with investors, there’s a bright side to historic data, as well.

On one hand, there’s no denying that stock market corrections and bear markets are perfectly normal aspects of the investing cycle. No matter how much well-wishing investors do, there is an abundance of catalysts that can tip a pricey stock market over the edge.

On the other hand, there’s a nonlinearity to the investing cycle that strongly favors (and rewards) patient investors.

In June 2023, shortly after the widely followed S&P 500 was confirmed to be in a new bull market, the analysts at Bespoke Investment Group released a data set on X that compared the length of every bull and bear market in the benchmark index dating back to the start of the Great Depression in September 1929.

As you can see, the average bear market in the S&P 500 has lasted only 286 calendar days (around 9.5 months) covering a span of 94 years. On the other end of the spectrum, the 27 bull markets since September 1929 have endured for an average of 1,011 calendar days, or more than 3.5 times as long as the typical bear market.

A separate analysis from Crestmont Research looked back to the start of the 20th century and found even more compelling results for long-term investors.

Crestmont calculated the 20-year rolling total returns (“total” meaning inclusive of dividends) for the S&P 500 dating back to 1900. This resulted in 106 rolling 20-year periods, with ending years of 1919 through 2024.

Here’s the kicker: All 106 rolling 20-year periods generated a positive total return. Hypothetically speaking, purchasing an S&P 500 tracking index at any point since the beginning of the 20th century and holding that position for 20 years would have been profitable 100% of the time.

Regardless of whether the stock market thrives, flops, or treads water during President Trump’s second term, the long-term outlook for equities remains promising.

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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.

Prediction: Stock Market Returns Will Achieve a Level Not Witnessed in 20 Years Under President Donald Trump was originally published by The Motley Fool