Wall Street’s bull market rally celebrated its two-year anniversary in October, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite rising by 31%, 55%, and 82%, respectively. The rally has been driven by factors such as artificial intelligence, a resilient US economy, investor euphoria over stock splits, better-than-expected corporate earnings, and increased corporate buybacks.
However, the Shiller price-to-earnings (P/E) Ratio, a historically flawless indicator of potential market downturns, suggests that the party may be nearing its end. The S&P 500’s Shiller P/E Ratio has reached a multiple of 37.55, surpassing the average multiple of 17.21 over the past 154 years.
This reading is rare and has only occurred six times since 1871, with each instance preceding significant declines in the markets. Historically, this indicator suggests that President Trump’s second term may be marked by a substantial stock market decline, potentially resulting in a 40% drop in stocks.
Despite the potential risks, history shows that stock market cycles are not linear and that downturns are a normal part of the investing cycle. Investors can take comfort in knowing that boom-and-bust cycles follow a predictable pattern, with bull markets lasting longer than bear markets on average. In fact, the S&P 500 has consistently produced positive total returns over rolling 20-year periods since 1900.
As investors look to President Trump’s second term, it is essential to take a step back and examine the big picture. With patience rewarded in the long run, history suggests that the Dow Jones, S&P 500, and Nasdaq Composite will continue to rise, albeit with potential fluctuations along the way.
Source: https://www.fool.com/investing/2025/03/02/will-stock-market-crash-40-president-trump-history