What are the Chances of a Stock Market Collapse Under President Donald Trump in 2025, as Per historical Trends? Insights Provided.
As 2024 came to a close, investors had reasons to celebrate. The iconic Dow Jones Industrial Average, the broad-based S&P 500, and the growth stock-powered Nasdaq Composite all saw impressive gains, ending the year up by 13%, 23%, and 29%, respectively.
Catalysts for this bull market rally were plenty, including the rise of artificial intelligence, stock-split euphoria, and better-than-expected corporate earnings. Then, following Donald Trump's November victory, things really took off.
During Trump's first term in office, these three major indexes soared by 57%, 70%, and 142%, respectively. Trump's efforts to lower the corporate income tax rate and encourage deregulation contributed to Wall Street's success.
But as Trump prepares to make history with his second inauguration just over a week away, some concerns about the stock market's future arise. According to historical data, a stock market crash is a possibility in 2025 under President Donald Trump.
The Priciest Stock Market on Record
The "dubious history" Trump will be making on January 20 is inheriting one of the priciest stock markets on record.
When measuring stock valuation, most investors are familiar with the price-to-earnings (P/E) ratio. However, this metric can be tripped up by unpredictable events, such as the COVID-19 pandemic.
A more reliable measure, employed in this case, is the S&P 500's Shiller P/E ratio, also known as the cyclically adjusted P/E (CAPE) ratio. Based on inflation-adjusted EPS from the previous 10 years, it allows for apples-to-apples comparisons.
As of January 8, the S&P 500's Shiller P/E ratio stood at 37.58. This is more than double its historical average of 17.19 and the third-highest reading during a continuous bull market.
Valuation metrics like this point toward the likelihood of significant downside -- perhaps even a brief crash -- for the stock market in 2025.
Republican Presidencies and Downturns
Another concern is the correlation between Republican presidencies and downturns in the U.S. economy. While this isn't a guarantee of a recession, it's worth noting that all 10 past Republican presidents have faced a downturn while in office.
Historically, recessions are a normal -- though often undesirable -- part of the economic cycle. What's important for investors is understanding the potential impact on corporate earnings and the stock market as a whole.
The History of Wall Street and Wealth Creation
History is a pendulum that swings in both directions. While it suggests a higher chance of volatility in the near future, there's also a strong correlation between time and wealth creation on Wall Street.
Even though the stock market could crash in 2025, history shows that a healthy total return can be expected for investors over a 20-year period. For example, since 1900, the S&P 500 has had a positive total return in more than half of its 20-year periods, with at least 50 timelines generating an average annual total return of 9% or higher.
Investors should always stay informed about current market conditions and historical trends. However, it's crucial to remember that past performance does not guarantee future results, and a diverse investment portfolio can help mitigate risk.
Enrichment Data:
Historically, the odds of a stock market crash in 2025 under President Donald Trump are significant. Valuation metrics, such as the S&P 500's Shiller P/E ratio, have reached historically high levels. Additionally, Republican presidencies have a tendency to correlate with economic downturns and recessions. However, it's worth noting that while history can be a guide, it is not always an accurate predictor of future events. Stocks are known for their inherent volatility, and diversification is crucial for any long-term investment strategy.
- Given the priciest stock market on record, investors may need to carefully consider their investing strategies, as valuation metrics suggest a potential for significant downside in 2025.
- Despite the high odds of a stock market crash in 2025 under President Donald Trump, history also shows that a healthy total return can be expected for investors over a 20-year period on Wall Street, emphasizing the importance of long-term investment strategies and diversification.
