As the new year begins, investors are wondering: will the stock bull market thrive or face a downturn under Donald Trump’s presidency in 2025? Let’s dive into historical data, valuation metrics, and economic patterns to better understand what could lie ahead.
Why Are Stock Market Valuations Raising Concerns?
At the start of 2025, the stock bull market is sitting at one of its priciest levels in history. How do you measure this? A widely used tool is the Shiller P/E ratio, which adjusts earnings data over the past 10 years for inflation. Currently, this ratio stands at 37.58, more than double the historical average of 17.19 since 1871. This level has only been reached six times in history, and each instance eventually led to significant market corrections ranging from 20% to 89%.
Such metrics not only raise questions about the overall valuation but also highlight the importance of tracking key indices like the SPX500, which reflects the performance of 500 major companies and serves as a benchmark for understanding broader market health.
Another measure raising alarms is the Buffett Indicator, named after famed investor Warren Buffett. This tool compares the total value of the stock market to the U.S. gross domestic product (GDP). Historically, a healthy ratio is around 85%, but in December 2024, it hit an all-time high of 209%. Such elevated levels suggest the market may be overheated and vulnerable to a downturn.
Is a Recession Likely Under a Republican Presidency?
Did you know every Republican president since 1913 has experienced at least one recession during their term? This includes Donald Trump, who faced a short recession during the pandemic. While recessions are a natural part of the economic cycle, history shows they often coincide with market downturns.
A study by Bank of America revealed that about two-thirds of stock market declines from their peak occurred during a recession. Could 2025 be next? Recent data, like the significant drop in the U.S. M2 money supply in 2023, hints that economic challenges could be brewing. However, no one can predict with certainty when or if a recession will happen.
How Does the Market Perform Over the Long Term?
Despite short-term uncertainties, history shows the stock bull market has been a reliable path to building wealth over time. For example, researchers found that since the Great Depression in 1929, bear markets (periods of decline) typically lasted about 9.5 months, while bull markets (periods of growth) often extended beyond 1,000 days.
Even more reassuring, an analysis of the S&P 500’s performance over rolling 20-year periods showed that every single 20-year period since 1900 resulted in positive returns. In fact, many periods delivered average annual returns of 9% or more, even after accounting for major market crashes. This means that, over time, investors who stayed committed often saw their portfolios grow.
What Should Investors Keep in Mind for 2025?
So, will the stock market crash under President Trump in 2025? While no one can predict the future, certain patterns from history offer clues. Elevated market valuations and economic warning signs suggest increased volatility could be on the horizon. However, history also shows that the market is a powerful tool for long-term wealth creation.
For investors, the key takeaway is to focus on the bigger picture. Diversification, patience, and a commitment to long-term goals can help weather periods of uncertainty. As we look ahead, one thing is clear: while short-term fluctuations may occur, the stock market’s potential for growth remains a constant.
Final Thoughts
Will history repeat itself, or will the market surprise us with resilience in 2025? Only time will tell. In the meantime, understanding the factors driving market movements can empower investors to make informed decisions and stay the course toward their financial goals.
