Donald Trump’s election as the 47th president of the United States has sparked speculation about how the stock market will perform during his second term. The S&P 500 Index, a key indicator of the U.S. stock market, has risen 26% so far this year. This growth has been driven by factors such as a strong job market, slowing inflation, and robust corporate earnings.
During Trump’s first term as president from 2017 to 2021, the S&P 500 delivered impressive returns of 70%, or an average of 14.1% per year. This performance was significantly higher than the long-term average of around 7% annually. In fact, since the creation of the S&P 500 in 1957, the index performed better under Trump than any other president except Bill Clinton.
However, investors should be cautious about expecting similar returns during Trump’s second term. The S&P 500 currently has a forward price-to-earnings (P/E) ratio of 22.2, which is much higher than the ratio of around 17 when Trump first took office in 2017. This suggests that the stock market is more expensive now than it was during his first term.
Trump’s impact on stock valuations
Historically, when the S&P 500’s forward P/E ratio has exceeded 22, it has been followed by periods of significant market corrections, such as the dot-com bubble burst and the 2022 bear market. Based on the current valuation, the S&P 500 may deliver an annualized return of only 3% over the next three years, according to Torsten Slok, Chief Economist at Apollo Global Management.
Investors are anticipating that Trump’s policies will create a more business-friendly environment, with expectations of tax cuts and regulatory rollbacks. However, some analysts caution that the initial market enthusiasm for populist leaders like Trump may be short-lived. Research suggests that populist policies often lead to lower economic growth, higher national debt, and increased inflation in the long run.
To prepare for potential market volatility, investors should temper their expectations, monitor market trends closely, and consider holding larger cash positions in their portfolios. While significant market drawdowns occur about once every two years on average, they have historically presented buying opportunities for investors with available cash. As Trump prepares to take office, market analysts will be watching closely to see which campaign promises he prioritizes and how his policies will impact both the U.S. and global economies.
While the stock market may initially react positively to the prospect of tax cuts and deregulation, the long-term economic consequences of populist policies remain uncertain.
