That number then rose from $200 billion to $250 billion in most quarters. Buyback activity can improve earnings per share (EPS) and make the stock more attractive to investors.

There is also the belief that the Trump administration will encourage deregulation. By minimizing regulatory oversight, the red carpet will be rolled out for increased M&A activity.

During President Barack Obama’s eight years in office, as well as President Trump and Joe Biden’s combined eight years in the White House, the stock market delivered decisively positive returns. Based on the catalysts mentioned above, Wall Street expects more gains when Trump leaves office in January 2029.

However, there is great reason to believe that President Trump may oversee the former decline in the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite since George W. Bush’s second term ended in January 2009. In other words, we would see the first negative stock market returns for a presidential term in 20 years .

to be abundantly clear (note the italics, because this is an important point), the potential downside for stocks over the next four years has nothing to do with President Trump’s policy proposals. In fact, the catalyst that could send stocks significantly lower awaited the candidate who would win the 2024 election.

Wall Street’s biggest concern during a Trump presidency is that the stock market is historically expensive, and there’s simply no quick fix for widening valuations.

While there are several ways to measure “value” on Wall Street, Shiller’s price-to-earnings (P/E) ratio of the S&P 500 does the most complete job. The Shiller P/E ratio is also commonly known as the cyclically adjusted P/E ratio, or Ratio CAP.

Unlike the traditional P/E ratio that relies on trailing 12-month EPS to decipher whether a stock is cheap or expensive relative to its peers and/or the broader market, Shiller’s P/E is based on the average EPA adjusted for inflation over the previous 10 years. Analysis of 10-year earnings history ensures that impact events cannot bias the calculation.

As of the closing bell on Jan. 22, the S&P 500’s Shiller P/E stood at 38.69, which is just shy of its peak during the current bull market rally. It is also more than double the average reading of 17.19, when a later test was done in January 1871.

While the Shiller P/E is not a timing tool, it does have an impeccable track record of foreshadowing bear markets on Wall Street. In 154 years, there have been only six times when the Shiller P/E has exceeded 30 during a bull market rally, including this one. After the previous five incidents, the Dow Jones and/or the S&P 500 lost at least 20% of their value, if not considerably more.

History would suggest that there is a realistic chance that the Dow Jones, the S&P 500 and the Nasdaq Composite will end up in the red when President Donald Trump’s second term ends.

While the prospect of the stock market going nowhere or ending up bearish for the next four years might not appeal to investors, there is also a bright side to the historical data.

On the one hand, there’s no denying that stock market corrections and bear markets are perfectly normal aspects of the investment cycle. As much as investors want it, there are plenty of catalysts that can bring down an expensive stock market.

On the other hand, there is a non-linearity in the investment cycle strongly it favors (and rewards) patient investors.

In June 2023, shortly after the much-followed S&P 500 was confirmed to be in a new bull market, analysts at Bespoke Investment Group released a dataset on X that compared the duration of each bull and bear market of the benchmark dating back to the start 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 (about 9.5 months) over a period of 94 years. At the other end of the spectrum, the 27 bull markets since September 1929 have lasted an average of 1,011 calendar days, or more than 3.5 times longer than the typical bear market.

An independent analysis by Crestmont Research looked back to the early 20th century and found even more compelling results for long-term investors.

Crestmont calculated 20-year total returns (“total” meaning including dividends) for the S&P 500 going back to 1900. This resulted in 106 20-year periods, with ending years from 1919 to 2024.

Here’s the starting point: All 106 20-year periods have produced a positive total return. Hypothetically speaking, buying an S&P 500 tracker anytime since the early 20th century and holding that position 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 outlook for stocks remains promising.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.

Prediction: Stock market returns to hit level not seen in 20 years under President Donald Trump was originally published by The Motley Fool