In case you haven’t noticed, the bulls are firmly in control on Wall Street. Year two of the current bull market saw the ageless Dow Jones Industrial Average (^DJI 0.92%), benchmark S&P 500 (^GSPC 0.53%), and growth-driven Nasdaq Composite (^IXIC 0.22%) respectively rise by 13%, 23%, and 29%, with all three indexes reaching numerous record-closing highs.

Professional and everyday investors have rallied around a plethora of catalysts, including the rise of artificial intelligence (AI), the resiliency of the U.S. economy, a decline in the prevailing rate of inflation, and excitement surrounding stock splits.

Donald Trump delivering remarks from behind the presidential podium.

President Trump at the 2020 Council for National Policy Meeting. Image source: Official White House Photo by Tia Dufour, courtesy of the National Archives.

But Wall Street’s rally really shifted into a higher gear in November after Donald Trump’s Election Day victory. President Trump’s first term in the White House saw the Dow Jones, S&P 500, and Nasdaq Composite respectively soar by 57%, 70%, and 142%. Even though past performance is no guarantee of future results, the clear indication is that investors are looking for a repeat performance during Trump’s second term.

While the table is certainly set for President Trump to deliver stock market returns that haven’t been witnessed in 20 years, the end result may differ dramatically from initial expectations.

Here’s why Wall Street is excited to have Donald Trump back in the White House

Before digging any deeper, it’s important to understand the dynamics behind the November rally in the Dow, S&P 500, and Nasdaq Composite following Trump’s victory.

Perhaps the biggest catalyst of all for equities is having the prospect of corporate income tax rate increases removed from the table. Whereas Democratic Party presidential nominee Kamala Harris had called for a 33% increase in the peak marginal corporate income tax rate, President Trump has opined it should be further reduced. Specifically, he pointed to lowering the peak marginal rate from 21% -- which is already the lowest level since 1939 -- to 15% for companies that manufacture their products in the U.S. 

To build on this point, keeping the peak marginal corporate income tax rate at an 86-year low, or perhaps lowering it even further, should encourage many of America’s most-influential publicly traded companies to repurchase their stock.

^DJI Chart

Wall Street's major stock indexes soared during Trump's first term in the White House. ^DJI data by YCharts.

Following the passage of Trump’s flagship Tax Cuts and Jobs Act (TCJA) in December 2017, there was marked uptick in cumulative share buybacks for S&P 500 companies. From 2011 through 2017, S&P 500 companies averaged around $100 billion to $150 billion in aggregate repurchases per quarter. Afterwards, 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 proverbial red carpet will be rolled out for an increase in merger and acquisition activity.

President Trump can oversee historic stock market returns -- but not in the way you might be thinking

During President Barack Obama’s eight years in office, as well as the four 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’d 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.

S&P 500 Shiller CAPE Ratio Chart

S&P 500 Shiller CAPE Ratio data by YCharts.

Though there a number of ways to measure “value” on Wall Street, the S&P 500’s Shiller price-to-earnings (P/E) Ratio 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 on 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.

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

Image source: Getty Images.

Relax: there’s good news, too!

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 are an abundance of catalysts that can tip a pricey stock market over the proverbial 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 only lasted 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.