How Likely Is a Stock Market Crash Under President Donald Trump? Several Century-Old Data Sets Offer an Answer.

NEW YORK – U.S. stock markets continue their impressive ascent more than a year into President Donald Trump's second term, with all three major indexes charting new all-time highs. Yet, as investor optimism buoys valuations, a collection of historical data sets spanning over a century suggests that significant headwinds are gathering, posing a potential threat to one of the most robust rallies in recent memory.

The market's performance under the Trump administration has been formidable. His first term delivered cumulative gains of 57% for the Dow Jones Industrial Average, 70% for the S&P 500, and a staggering 142% for the tech-heavy Nasdaq Composite. The encore has been similarly strong; since Inauguration Day on January 20, 2025, the Dow, S&P 500, and Nasdaq are up 14%, 16%, and 20%, respectively, as of February 2, 2026.

This sustained rally has been fueled by investor enthusiasm for a lower corporate tax environment and a dovish Federal Reserve engaged in a rate-easing cycle. But as valuations stretch, a closer look at historical precedent indicates that the risk of a significant market downturn may be higher than current sentiment suggests.

The Weight of History: Three Bearish Indicators

While no single indicator can predict short-term market movements with certainty, history often provides a valuable framework for assessing risk. Three distinct, time-tested data sets are currently signaling caution for investors.

1. The Shiller P/E Ratio Signals Extreme Valuation

Arguably the most prominent warning sign comes from the market's historically high valuation, as measured by the Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E (CAPE) Ratio.

• What It Is: The CAPE Ratio smooths out short-term profit volatility by measuring the current price of the S&P 500 against average inflation-adjusted earnings from the previous 10 years. Its data extends back to 1871.

• Historical Context: Over its 155-year history, the CAPE Ratio has an average reading of approximately 17.3. Throughout January 2026, it has hovered in a range of 39 to 41. This places the current market as the second-most expensive in U.S. history, surpassed only by the peak of the dot-com bubble.

• The Warning Signal: A CAPE Ratio above 30 has been a reliable harbinger of future trouble. Every previous instance where the ratio has sustained a level above 30 has ultimately been followed by a severe bear market, with one or more of the major indexes declining between 20% and 89%. While it offers no timing clues, it suggests the market is priced for a level of perfection that is rarely maintained.

2. The Political Cycle and Economic Risk

A second, century-old pattern links the U.S. economic cycle to the political party occupying the White House, presenting another potential headwind.

• The Partisan Pattern: Since 1913, the U.S. has had 19 presidents—10 Republicans and nine Democrats. All 10 Republican presidents, including Donald Trump during his first term, have overseen the start of an economic recession. In contrast, only four of the nine Democratic presidents have seen a recession begin on their watch.

• Economic Link to Markets: While the stock market is not the economy, the two are intrinsically linked. Economic recessions lead to weaker consumer demand, lower corporate profits, and higher unemployment—all factors that eventually weigh heavily on stock prices. The historical correlation, while not a guarantee, points to a statistically higher probability of an economic downturn that could disrupt the market rally.

3. The Midterm Election Jitters

This year, 2026, is also a midterm election year, a period historically associated with heightened stock market volatility.

• The Midterm Effect: According to data from Carson Group's Chief Market Strategist, Ryan Detrick, the S&P 500 has experienced its largest average intra-year drawdowns during midterm election years. Since 1950, the benchmark index has seen an average peak-to-trough correction of 17.5% in midterm years. For context, the S&P 500 fell nearly 20% during 2018, the midterm year of Trump's first term.

• The Political Mechanism: The uncertainty surrounding midterm elections is the primary driver of this volatility. With Republicans currently holding a slim majority in the House of Representatives, even a minor shift in voter sentiment could result in a divided government. The prospect of legislative gridlock can unnerve investors, as it creates uncertainty around future fiscal policy, taxes, and regulation.

Perspective for the Long-Term Investor

Despite these ominous historical signals, it is crucial to place them in a broader context. While the data points suggest a significant market correction or even a bear market could be on the horizon, they do not guarantee an imminent "crash."

History, when viewed through a wider lens, overwhelmingly favors the optimist.

• Downturns Are Normal: Stock market corrections (declines of at least 10%) and bear markets (declines of at least 20%) are not anomalies; they are a normal and inevitable part of the investing cycle. Many strategists view these downturns as the "price of admission" for accessing the long-term wealth creation potential of the stock market.

• The Power of Time: The most powerful historical precedent of all is the market's long-term resilience. Every single correction, bear market, and crash in the history of the U.S. stock market has eventually been erased by a subsequent bull market rally that carried indexes to new highs. For long-term investors, periods of volatility have historically represented buying opportunities, not a reason to panic.

The Bottom Line

Investors are currently navigating a complex environment. The market is enjoying a powerful, policy-driven rally, but stands at a precarious valuation level not seen since the dot-com era. Historical patterns related to valuation, the political cycle, and midterm elections all suggest that the path forward will likely be more volatile than the recent past.

While a significant drawdown appears more probable than a continued, uninterrupted climb, this does not necessarily equate to a systemic crash. For investors, the key takeaway is not to time the market but to be prepared for a potential increase in turbulence. Watching corporate earnings reports, Federal Reserve communications, and the evolving political landscape will be critical in the months ahead to gauge whether these historical headwinds will finally bring the Trump rally to a halt.