The Trump Bull Market Will Soon Be Derailed by This Historically Insurmountable Headwind

From an investment perspective, Wall Street is a fan of Donald Trump in the White House. During President Trump’s first term, the mature were driven by actions Dow Jones Industrial Average (DJINDICES: ^DJI)landmark S&P 500 (SNPINDEX: ^GSPC)and fueled by innovation Nasdaq Composite (NASDAQINDEX: ^IXIC) won 57%, 70% and 142% respectively.

In the year and change since he was inaugurated for a second, non-consecutive term, a Trump bull market rally has taken shape. From Jan. 20, 2025, to the closing bell on Feb. 10, 2026, the Dow, S&P 500, and Nasdaq Composite rose 15%, 16%, and 18%, respectively. Big returns have become the norm.

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While several catalysts are behind this extremely strong market, some of which can be attributed to Donald Trump, there are also headwinds that can derail this rally. An insurmountable obstacle that has more than 150 years of history in sails is particularly worrying.

To get a bit of housekeeping out of the way, Wall Street’s major indexes climbing is nothing new. Since March 1897, there have been 33 presidential terms, 26 of which have resulted in a positive return in either the Dow Jones Industrial Average or the S&P 500. Most presidents oversee a growing U.S. economy and investment optimism, leading to stock market gains during their tenure — and Trump was no exception.

Still, President Trump’s early second-term annual returns are among the best of any president in over a century. As investors, it pays to understand what’s behind this extraordinary return.

Not all of the stock market’s growth catalysts were influenced by the president. For example, the rise of artificial intelligence (AI), which began during Joe Biden’s presidency, and the advent of quantum computing play a key role in elevating the broader market. Analysts at PwC believe that AI can add $15.7 trillion to the global economy by 2030, while the Boston Consulting Group estimates that quantum computing will create up to $850 billion in global economic value by 2040. These technologies are clearly exciting investors.

President Trump also had no hand in the Federal Reserve cutting interest rates six times since September 2024. Lower lending rates can encourage corporate borrowing, which in turn leads to an increase in hiring, purchasing activity and capital devoted to innovation.

But the president’s policies undoubtedly played a role in facilitating the rise in stocks. For example, the flagship tax and spending law he signed in December 2017, the Tax Cuts and Jobs Act, permanently reduced the top marginal corporate income tax rate from 35% to 21%. This marked the lowest top corporate tax rate since 1939.

Although the purpose of a lower corporate income tax rate is to encourage employment and innovation, the excess income that businesses have retained has led to a historic number of share buybacks. According to S&P Dow Jones Indices, a division of the most familiar S&P GlobalS&P 500 companies were projected to exceed a record $1 trillion in cumulative buybacks in 2025. Share buybacks can increase earnings per share for public companies with flat or growing net income, making them more attractive to value investors.

While Trump’s tariff and trade policy has had controversial moments for the US economy and Wall Street since its launch in April 2025, it has also brought significant investment to the US from certain companies.

While it would appear that the Trump bull market is unstoppable, a historically accurate valuation tool tells a different story.

Make no mistake about it: every bull market has headwinds to contend with. For example, a historic level of division within the Federal Open Market Committee threatens to turn America’s most important financial institution, the Federal Reserve, into a stock market liability.

But there is arguably an even more telling historical headwind that may pull the rug right out from under the Trump bull market — and it has to do with stock valuations.

Of course, value is subjective. Since there is no blueprint for valuing an individual stock or the broader market, what you consider expensive might be viewed as a bargain by another investor. The subjective nature of stock valuation is one of the factors that makes the short-term directional movements of the Dow, S&P 500 and Nasdaq Composite so unpredictable.

However, one time-tested valuation tool has done an exceptional job of reducing this subjectivity: the Shiller price-to-earnings (P/E) ratio of the S&P 500. You’ll sometimes see the Shiller P/E referred to as the cyclically adjusted P/E ratio or the CAPE ratio.

Instead of taking trailing 12-month earnings into account, as the traditional P/E ratio does, the Shiller P/E is based on average inflation-adjusted earnings over the past 10 years. Accounting for a decade of earnings history, rather than just 12 months, ensures that recessions and other shock events (eg, the COVID-19 pandemic) cannot significantly alter the reading.

Although economists introduced the Shiller P/E in the late 1980s, it has been tested back to January 1871. Over the past 155 years, this valuation benchmark has averaged a modest multiple of 17.34.

However, over the past three decades, it has spent most of its time above this long-term average. The Internet removed the information barriers that had existed for more than a century between Wall Street and Main Street, along with lower interest rates, encouraged retail investors to seek growth stocks and accept more risk, including higher earnings multiples.

But as of the closing bell on Feb. 10, the S&P 500’s CAPE ratio hit 40.36. This is the second most expensive stock market in history, trailing only the dot-com bubble, which peaked at a Shiller price/earnings ratio of 44.19 in December 1999.

Since January 1871, the Shiller P/E has exceeded 30 on only six occasions, including today. Following the previous five appearances, the Dow Jones Industrial Average, S&P 500 and/or Nasdaq Composite have lost between 20% and 89% of their value. While the 89% peak-to-trough drop that the Dow experienced during the Great Depression is unlikely to be repeated, history has made it abundantly clear that extended valuations lead to possibly (keyword!) significant declines in Wall Street’s major stock indexes.

While the CAPE report is not a timing tool, it has an impeccable track record of foreshadowing the end of Wall Street markets. If history were to repeat itself, the Trump bull market could soon come to an unceremonious end.

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Prediction: Trump Bull Market Will Soon Be Derailed, This Historically Insurmountable Headwind Is to Blame was originally published by The Motley Fool