Outsize stock market returns have been a theme with President Donald Trump in the White House. The iconic Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and innovation-driven Nasdaq Composite (NASDAQINDEX:^IXIC) rallied 57%, 70%, and 142%, respectively, during his first non-consecutive term, and have gained 18%, 30%, and 40% since the start of his second term.
Trump’s presidency has benefited from the artificial intelligence (AI) infrastructure build-out, better-than-expected corporate earnings, and record S&P 500 share repurchases. The latter has been fueled by the president’s flagship tax-and-spending law from his first term, the Tax Cuts and Jobs Act, which permanently lowered the peak marginal corporate income tax rate to 21%.
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Image source: Official White House Photo by Patrick B. Ruddy.
But things may not be as rosy as Wall Street’s major stock indexes indicate. Although history can’t concretely predict what’s to come, past events have a knack for foreshadowing big moves in the Dow, S&P 500, and Nasdaq Composite.
Right now, two prediction tools, neither of which has ever been wrong, point to a significant forthcoming decline in stocks under President Trump.
A historically pricey stock market portends disaster
Perhaps the most visible concern for the bull market that’s flourished under President Trump since his second term inauguration is stock valuations.
Valuing individual stocks and the broader market is particularly tricky because there isn’t a step-by-step blueprint for doing so. Investors’ emotions and subjectivity often come into play, making it especially challenging to predict short-term directional moves in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.
But the one time-tested valuation tool that’s demonstrated its ability to cut through this emotion and subjectivity is the S&P 500’s Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio). Currently, the Shiller P/E Ratio is making dubious history.
Though economists introduced the Shiller P/E less than 40 years ago, it’s been backtested nearly 156 years to January 1871. Over this time frame, the Shiller P/E Ratio has averaged 17.42. As of the closing bell on Oct. 7, this premier valuation tool had a multiple of 41.80, with the evolution of AI powering stock valuations into the stratosphere.
