As President Donald Trump embarks on his second, non-consecutive term, the stock market presents a mixed picture that blends recent gains with underlying risks. Trump’s first term saw remarkable stock market performance, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite posting cumulative returns of 57%, 70%, and a staggering 142%, respectively, by the end of his presidency in January 2021.
Since his latest inauguration on January 20, 2025, these indexes continue to soar, with increases of 14% in the Dow, 16% in the S&P 500, and 20% in the Nasdaq by early February 2026. Investors have generally praised a lower peak marginal corporate income tax rate and the Federal Reserve’s ongoing rate-easing measures, which have contributed to the market rally.
However, as the trajectory remains positive, significant headwinds are emerging that could challenge this momentum. The historical Shiller Price-to-Earnings (P/E) Ratio, a prominent valuation measure based on the average inflation-adjusted earnings over the previous decade, is currently hovering between 39 and 41. This level marks the second-highest in history, suggesting that the market may be overvalued. Such high Shiller P/E ratios have typically preceded substantial market corrections ranging from 20% to 89% in the past.
Moreover, historical trends indicate a correlation between recessions and the political party of the sitting president. Since 1913, all ten Republican presidents have overseen the onset of a recession, in contrast to just four out of nine Democrat presidents. Though the stock market does not always mirror the economy, a recession would likely affect corporate profits and investor sentiment negatively.
Adding to the uncertainty is the midterm election year, which has historically been characterized by increased market volatility. According to data, the S&P 500 has averaged a drawdown of 17.5% in midterm election years since 1950. Observers recall that the S&P fell nearly 20% during the second year of Trump’s first term, demonstrating the potential for significant corrections as the electoral landscape shifts.
Despite these concerns, historical data also offer a counter-narrative. Stock market corrections are a regular part of market cycles and have often been resolved relatively quickly. For instance, the COVID-19 crash under Trump saw a recovery after only 33 days. Conversely, bull markets tend to last significantly longer, with an average duration of nearly three years.
In analyzing rolling 20-year returns, research suggests that every 20-year period since 1900 has yielded positive annualized returns for the S&P 500, regardless of the economic challenges faced. This historical resilience implies that, even if short-term turbulence occurs under Trump’s administration, long-term investors may still find favorable outcomes eventually.
While it is impossible to predict exact movements in the stock market, a careful consideration of both historical precedent and current variables highlights the complexity of the investment landscape as Trump’s presidency evolves. Long-term optimism may still prevail, provided investors maintain a broader perspective amidst inevitable market fluctuations.
