In case you haven't noticed, the bulls have firm control of Wall Street. Year two of the current bull market saw Dow Jones's industrial average(Djindices: ^dji)Benchmark S&P 500(Snpindex: ^GSPC)and driven by growth NASDAQ Compound(Nasdaqindex: ^ixig) Rise 13%, 23%, and 29%, respectively, with the three index reaching a number of highest closing highlights.
Professional and daily investors have assembled around a host of catalysts, including the rise of artificial intelligence (AI), the resilience of the US economy, a decline in the overall inflation rate, and excitement of stock split.
President Trump at the 2020 National Policy Meeting. Image Source: The Official Photo of the White House by Tia Dufour, courtesy of the National Archives.
But the Wall Street rally moved into a higher gear in November after Donald Trump's election day's victory. President Trump's first season at the White House saw the Dow Jones, S&P 500, and NASDAQ Compound Soar 57%, 70%, and 142%, respectively. While past performance does not guarantee future results, the clear indication is that investors are looking for repeated performance during Trump's second season.
While the table is certainly set to President Trump to send stock market earnings that have not been seen in 20 years, the end result may differ dramatically to the initial expectations.
Before digging any deeper, it is important to understand the dynamics behind the November Rally in the Dow, S&P 500, and the NASDAQ compound following Trump's victory.
Perhaps the biggest catalyst for equity is to have the hope of increased corporate income tax rates removed from the table. While the President of Democratic Party Kamala Harris's nominee called for a 33% increase in the peak marginal corporate income tax rate, President Trump has said it should be reduced further.
In particular, it highlighted reducing the peak marginal rate of 21% – already at the lowest level since 1939 – to 15% for companies producing their products in the US
In order to build on this point, the peak marginal corporate income tax rate should be kept at a minimum of 86 years-or may be reduced even further-anonuted many publicly traded American trafficked companies to repurchase their stock.
Following the passing of Trump's leading tax and job cuts Act (TCJA) in December 2017, cumulative share purchases increased for S&P 500 companies. From 2011 and 2017, S&P 500 companies were on average approximately $ 100 billion to $ 150 billion In repurchase the quarter aggregates.
After that, this figure jumped to $ 200 billion to $ 250 billion in most quarters. Back purchase activity can improve earnings per share (EPS) and make stocks more attractive to investors.
There is also the belief that Trump's administration will foster deregulation. By moving to reduce regulatory supervision, the red carpet will be introduced for an increase in merger and procurement activity.
During President Barack Obama's eight years in his post, as well as eight years the tenure of President Trump and Joe Biden in the White House, the stock market delivered positive definite earnings. Based on the catalysts listed above, Wall Street expects more earnings when Trump leaves his post in January 2029.
However, there is a great reason to believe that President Trump could supervise the first decline In the industrial average of Dow Jones, S&P 500, and the NASDAQ compound for the second season of George W. Bush, which ended in January 2009. That is, we would witness the first negative stock market earnings for a presidential season in 20 years.
To be clear enough (Note the italics, because this is an important point), the potential for stocks has no lower over the next four years to do with President Trump's policy proposals. In fact, the catalyst that could send stocks was particularly lower -Aros whatever candidate won the 2024 election.
The biggest concern for Wall Street during Trump's presidency is that the stock market is historically expensive – and simply there is no quick solution for extended valuations.
While there are several ways to measure “value” on Wall Street, Shiller S&P 500 (P/E) price-to-ears ratio do the most comprehensive work. The P/E shiller ratio is also commonly known as the cyclic P/E ratio, or Cape ratio.
Unlike the traditional P/E ratio that rely on drag-12-month eps to interpret if stock is cheap or costly compared to its peers and/or the wider market, ' R Shiller P/E based on customized EPS for inflation over the previous 10 years. Analysis of 10 years of earnings history ensures that shock events cannot deviate the census.
From the conclusion on January 22, Shiller P/E y S&P 500 was 38.69, which is slightly shy of its high during the current bull market rally. It is also more than double the average reading of 17.19, when it was tested back up to January 1871.
While the P/E shiller is not a timing tool, it has a non -decomposing history of precursor bear markets for Wall Street. Spanning 154 years, there have only been six cases where the Shiller P/E has exceeded 30 during a bull market rally, including the present. Following the previous five events, the Dow Jones and/or S&P 500 shed at least 20% of their value, if not much more.
History would suggest that there is a realistic chance that the Dow Jones, S&P 500, and the NASDAQ compound will finish in the red when President Donald Trump's second season is over.
Image source: Getty images.
Although the hope of the stock market may not go anywhere or end lower over the next four years sitting well with investors, there is also a bright side of historical data.
On one hand, it cannot be denied that stock market corrections and bear markets are completely normal aspects of the investment cycle. Regardless of how many investors want to do, there are plenty of catalysts that can heap a costly stock market over the edge.
On the other hand, there is non -linearity to that investment cycle strong Favorite (and rewards) of patient investors.
In June 2023, shortly after the widely followed S&P 500 was confirmed that in a new bull market, the analysts in the bespoke investment group released a data set on X which compared the length of each bull and bear market The benchmark index dating back to the beginning of the Great Depression in September 1929.
As you can see, the average bear market in the S&P 500 has lasted only 286 calendar days (approximately 9.5 months) covering a span of 94 years. At the other end of the spectrum, the 27 bull markets since September 1929 have suffered for an average of 1,011 calendar days, or more than 3.5 times as long as the typical bear market.
A separate analysis of Crestmont Research looked back to the early 20th century and found even more compelling results for long -term investors.
Crestmont calculated the total roll earnings of 20 years (“Total” involving dividends) for the S&P 500 dating back to 1900. This led to 106 periods 20 years rolling, with years ended from 1919 through 2024.
Here's the kicker: All 106 20 -year roller periods produced total positive earnings. Speaking theoretically, the purchase of S&P 500 tracking index at any time since the early 20th century and holding that post for 20 years would have been profitable 100% of the time.
Regardless of whether the stock market thrives, flops, or treads water during President Trump's second term, the long -term forecast for equity remains promising.
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