Is the Trump Bull Market in Its Final Act? History Offers a Decisive Answer.
Statistically, the stock market has thrived under President Donald Trump. When his first term concluded (Jan. 20, 2017 – Jan. 20, 2021), the time-tested Dow Jones Industrial Average(DJINDICES: ^DJI), benchmark S&P 500(SNPINDEX: ^GSPC), and innovation-driven Nasdaq Composite(NASDAQINDEX: ^IXIC) had risen by 57%, 70%, and 142%, respectively.
The first year of Trump’s second term was something of an encore performance, with all three indexes climbing by double-digit percentages. The evolution of artificial intelligence, the advent of quantum computing, and the expectation of lower interest rates fueled the Trump bull market.
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However, this optimism has given way to a wall of worry over the last five weeks. Uncertainties surrounding the Iran war have heightened stock market volatility, briefly sending the Dow and Nasdaq Composite into correction territory.
President Trump in an Oval Office meeting. Image source: Official White House Photo by Daniel Torok.
While some investors see this as nothing more than a normal pullback for equities, history would beg to differ. Two aspects of historical precedent point to the Trump bull market entering its final act.
Although a lot of attention is rightly being paid to the unprecedented energy supply disruption caused by the Iran war, as well as the subsequent oil price shock, history reminds us that midterm election years are generally bad news for the stock market.
For the moment, Republicans hold a majority in both houses of Congress and control the White House. However, the party in the White House has lost seats in Congress in 20 of the last 23 midterms (dating back to 1934). The Republican majority in the House of Representatives is so narrow that it wouldn’t take much of a swing in votes to shift the majority to Democrats.
In some ways, a divided Congress could be good news for Wall Street in the sense that no major legislation is likely to be signed into law. At the same time, shake-ups can lead to uncertainty, which is the enemy of investors.
According to Carson Group’s Chief Market Strategist, Ryan Detrick, we just entered the worst quarter of the presidential cycle, based on S&P 500 quarterly returns. Whereas year three of a president’s term is typically all systems go for investors, the second quarter of year two (April 1 – June 30) is one of only two quarters that have averaged a negative return since 1950. Over the last 75 years, the second quarter of year two has delivered an average decline of 2.8% in the benchmark index.
Unfortunately, this is only part of the story when it comes to midterms.
Additional data from Carson Investment Research finds that peak-to-trough corrections in the S&P 500 are steeper during midterm years. Since 1950, the average peak-to-trough decline in the broad-based index is 17.5%. For what it’s worth, the S&P 500 fell nearly 20% during midterms in the second year of President Trump’s first term.
While historical precedent can’t guarantee short-term directional moves in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, 75 years of midterm data conclusively point to the potential for significant weakness in equities and the possible end to the Trump bull market.
Image source: Getty Images.
The other piece of the puzzle that strongly suggests the end of the bull market under President Trump is near is stock valuations.
To be fair, value is subjective. Without a one-size-fits-all blueprint for evaluating and valuing public companies, every investor is going to have a unique interpretation of which stocks are cheap or pricey. This subjectivity is one of the primary reasons short-term directional moves in the Dow, S&P 500, and Nasdaq Composite are so unpredictable.
There is, however, one valuation tool that does an exceptionally good job of moving beyond this subjectivity and provides investors with the closest thing to an apples-to-apples comparison of broad-market valuations.
The S&P 500’s Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), accounts for 10 years of inflation-adjusted earnings. While the traditional P/E ratio, which factors in only trailing 12-month earnings, can be tripped up by recessions, shock events won’t have a meaningful impact on the Shiller P/E.
When back-tested to January 1871, the CAPE Ratio has averaged 17.35. But it entered 2026 at its second-priciest multiple in 155 years. The Shiller P/E has spent much of the last six months bouncing between 39 and 41.
Historically, S&P 500 Shiller P/Es above 30 have been a harbinger of coming disaster. Although this valuation tool offers no help in determining when the music will stop for stocks, it makes clear that investors don’t tolerate premium valuations over long periods. The five previous instances when the CAPE Ratio exceeded 30 were eventually followed by declines of 20% to 89% in one or more of Wall Street’s major stock indexes.
A Shiller P/E ratio north of 40 is even rarer. The 21 months spent above 40 during and after the dot-com bubble burst eventually sucked 49% and 78% of the value out of the S&P 500 and Nasdaq Composite, respectively. Meanwhile, the CAPE Ratio spent one week above 40 in early January 2022, which was followed by the 2022 bear market.
Between the performance of stocks in midterm years and when priced at a premium, the writing appears to be on the wall that the Trump bull market is winding down.
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