When 2024 came to a close, investors had every reason to smile. The iconic Dow Jones Industrial Average (^DJI 0.25%), broad-based S&P 500 (^GSPC 0.16%), and growth stock-powered Nasdaq Composite (^IXIC -0.06%) respectively ended the year higher by 13%, 23%, and 29%.

Catalysts have been aplenty, with the rise of artificial intelligence (AI), stock-split euphoria, and better-than-expected corporate earnings fueling year two of the bull market rally. But things really kicked into high gear following Donald Trump’s November victory.

Donald Trump addressing reporters in the White House briefing room.

President Donald Trump giving remarks. Image source: Official White House Photo by Andrea Hanks, courtesy of the National Archives.

During Trump’s first term in office, the Dow Jones, S&P 500, and Nasdaq Composite soared by 57%, 70%, and 142%, respectively. Trump’s efforts to lower the corporate income tax rate and encourage deregulation lit a fire on Wall Street.

However, Trump will be making dubious history when he’s inaugurated in just over a week -- and this has nothing to do with serving nonconsecutive terms. Based on what history tells us, a stock market crash is within the realm of possible outcomes in 2025 under President Donald Trump.

Trump is inheriting one of the priciest stock markets on record

The “dubious history” Trump is set to make on Jan. 20 is the inheritance of a historically pricey stock market.

When it comes to valuation tools, most investors are probably familiar with the traditional price-to-earnings (P/E) ratio, which divides a company’s share price into its trailing-12-month earnings per share (EPS). This quick valuation measure often works great for mature businesses, but it can be easily tripped up when unpredictable shock events occur, such as the COVID-19 pandemic.

A considerably better measure of value is the S&P 500’s Shiller P/E Ratio, which is also commonly known as the cyclically-adjusted P/E Ratio (CAPE Ratio). The Shiller P/E is based on average inflation-adjusted EPS from the previous 10 years. Analyzing a decade of inflation-adjusted earnings history minimizes the impact of shock events and allows for apples-to-apples valuation comparisons.

As of the closing bell on Jan. 8, the S&P 500’s Shiller P/E Ratio stood at 37.58, which is more than double its average reading of 17.19, when back-tested to January 1871, and the third-highest reading during a continuous bull market. 

S&P 500 Shiller CAPE Ratio Chart

S&P 500 Shiller CAPE Ratio data by YCharts.

What’s particularly worrisome is what’s happened in the wake of Shiller P/E readings above 30 throughout history. There have been only six occurrences in 154 years where the Shiller P/E has topped 30, including the present, and the previous five were eventually followed by declines ranging from 20% to 89% in the Dow, S&P 500, and/or Nasdaq Composite. In other words, premium valuations aren’t tolerated over long periods.

And the S&P 500’s Shiller P/E isn’t the only valuation tool sounding alarm bells. The “Buffett Indicator,” which is named after Berkshire Hathaway’s investor extraordinaire Warren Buffett, hit an all-time high in December.

The Buffett Indicator, which divides the market cap of all publicly traded companies into U.S. gross domestic product (GDP), was labeled as “probably the best single measure of where valuations stand at any given moment” by the Oracle of Omaha in 2001. Whereas this market-cap-to-GDP ratio has averaged 85% (0.85) since 1970, it touched 209% in December 2024. 

Both valuation metrics point to the growing likelihood of significant downside -- perhaps including a brief crash -- for the stock market in the new year.

Republican presidencies and recessions have historically gone hand-in-hand

Another concern based solely on history as Donald Trump prepares to take office is the strong correlation between Republican presidencies and downturns in the U.S. economy.

Before proceeding any further, let’s make clear that recessions are a normal and inevitable part of the economic cycle. No amount of well-wishing or monetary/fiscal policy maneuvering can deter economic downturns forever.

With the above being said, there have been 10 Republicans and nine Democrats in the Oval Office since 1913. Whereas four Democrats didn’t have a recession begin under the tenure, all 10 Republicans endured a recession while in office. This includes Donald Trump, who navigated America through the two-month recession that occurred during the pandemic. 

Although the U.S. economy and stock market aren’t tied at the hip, weakness in the U.S. economy tends to have a negative impact on corporate earnings. Based on a study by Bank of America Global Research from 1927 through March 2023, in the neighborhood of two-thirds of the S&P 500’s peak-to-trough drawdowns occurred during, not prior to, a recession being declared. 

While this strongly correlative data doesn’t guarantee a recession will occur in 2025, there are a few predictive tools, such as the historic decline witnessed in U.S. M2 money supply in 2023, which suggest an economic downturn is coming.

A smiling person reading a financial newspaper while seated at a table in their home.

Image source: Getty Images.

History is quite clear what happens to the broader market over long periods

Though there are tangible, history-based concerns as Donald Trump prepares to take office for his second term, the important thing for investors to remember is that history is a pendulum that swings in both directions. Even though it portends the likelihood of volatility in the not-too-distant future, there’s also a very strong correlation between time and wealth creation on Wall Street.

For example, the researchers at Bespoke Investment Group shared a data set on social media platform X in June 2023 that compared the length of every bear and bull market for the S&P 500 dating back to the start of the Great Depression in 1929. The difference between bear and bull markets was night-and-day. 

Out of the 27 bear markets for the S&P 500 spanning 94 years, the average downturn lasted just 286 calendar days (roughly 9.5 months), with the longest decline clocking in at 630 calendar days. On the other hand, the typical bull market stuck around for 1,011 calendar days, with more than half (14 of 27) of all bull markets (including the present bull market) lasting longer than the lengthiest bear market.

The analysts at Crestmont Research took things one step further and examined the performance of the S&P 500 over rolling 20-year periods, inclusive of dividends, since the start of the 20th century. Even though the S&P 500 didn’t exist until 1923, Crestmont was able to track its components to other indexes from 1900 through 1923 to obtain total return data. 

Crestmont’s rolling 20-year total return data for the S&P 500 yielded 105 ending periods (1919 through 2023). All 105 periods produced a positive total return, with at least 50 of these timelines generating an average annual total return of 9% or higher. Hypothetically, if you bought an S&P 500 tracking index at any point since 1900 and held that position for 20 years, you would have made money.

While there’s no guarantee the stock market will crash in 2025 under President Donald Trump, history suggests it’s a practical lock that the major indexes will generate a healthy total return for investors over the next 20 years.