A Historical Double Whammy Makes a Stock Market Crash More Likely Under President Donald Trump

From a statistical standpoint, President Donald Trump has been great for Wall Street. During his first term (Jan. 20, 2017 – Jan. 20, 2021), the widely followed Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and technology-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) soared 57%, 70%, and 142%, respectively.

Since Trump's second, non-consecutive term began on Jan. 20, 2025, we've observed a similar outperformance from Wall Street, albeit with plenty of volatility, too! The Dow, S&P 500, and Nasdaq Composite have rallied 14%, 23%, and 34%, through the closing bell on May 8, 2026.

On an annualized return basis, the stock market's major indexes have delivered higher returns with Trump in the White House than under most presidents since the late 1890s.

President Trump delivering a speech. Image source: Official White House Photo by Joyce N. Boghosian.

While part of this outperformance can be attributed to the evolution of artificial intelligence, there's no overlooking the role Trump's Tax Cuts and Jobs Act has had on Wall Street. Permanently lowering the peak marginal corporate income tax rate from 35% to 21% allowed companies to retain more of their earnings, leading to record share buybacks for S&P 500 companies in 2025.

But as the Dow, S&P 500, and Nasdaq Composite have ascended to the heavens, so has the likelihood of a stock market crash taking place under President Trump. While the past can't guarantee what's to come for stocks, history has a way of rhyming on Wall Street more often than not.

Premium stock valuations have proved unsustainable for 155 years

There's arguably no greater historical threat to the rip-roaring bull market under President Trump than stock valuations.

To be fair, "value" is a tricky subject because it's subjective. There isn't a one-size-fits-all way to evaluate public companies or the broader market, which means what one investor finds pricey might be viewed as a bargain by another. The subjectivity of stock valuations is what makes predicting short-term moves in the Dow, S&P 500, and Nasdaq Composite so challenging.

But there's one time-tested valuation tool that has an immaculate track record of cutting through emotions and subjectivity to provide investors with the closest thing they'll get to an apples-to-apples valuation comparison on Wall Street: the Shiller Price-to-Earnings (P/E) Ratio. You'll also see the Shiller P/E referred to as the Cyclically Adjusted P/E Ratio, or CAPE Ratio.

Shiller PE Ratio hits 2nd highest level of all-time, only slightly behind the Dot Com Bubble 🚨🚨🚨 pic.twitter.com/Se55FZmnbZ

-- Barchart (@Barchart) May 1, 2026

The S&P 500's Shiller P/E is based on average inflation-adjusted earnings over the previous 10 years, differing from the traditional P/E ratio, which accounts only for trailing 12-month earnings. Accounting for a decade of earnings history ensures this valuation tool remains useful in any economic climate.

When back-tested to January 1871, the CAPE Ratio has averaged a multiple of 17.36. But as of the closing bell on May 8, it had surpassed 42. The only time the stock market has been pricier is in the lead-up to the bursting of the dot-com bubble, when the Shiller P/E peaked at 44.19.

History has made it crystal clear that CAPE Ratios above 30 aren't tolerated over extended periods. Excluding the present, the previous five times that the S&P 500's Shiller P/E exceeded 30 were all eventually (keyword!) followed by declines of 20% or considerably more in the Dow, S&P 500, and/or Nasdaq Composite.

Historically speaking, this is the second-priciest stock market in history, and it's unlikely to support such aggressive valuation premiums for much longer.

Image source: Getty Images.

The Iran war is a historical double whammy that heightens the likelihood of a stock market crash

But it's not just premium valuations that are increasing the likelihood of a stock market crash under President Trump. The Iran war is acting as a double whammy that can upend the Trump bull market.

On Feb. 28, U.S. military forces, at the president's command, commenced attacks against Iran. Shortly thereafter, Iran shut down the Strait of Hormuz to virtually all commercial vessels, effectively halting the movement of 20 million barrels of liquid petroleum per day. This accounts for approximately 20% of global demand and represents the largest energy supply disruption in modern history.

As you might expect, the reaction in energy markets has been swift. Crude oil prices have soared, and consumers are dealing with sticker shock at the fuel pump. Gas prices have jumped at their fastest pace in over 30 years.

⛽ Average U.S. gas prices per gallon on May 6, per AAA:

• Regular: $4.54 (⬆️ $1.56 since war in Iran began on Feb. 28)

• Premium: $5.39 (⬆️ $1.85 since war began)

• Diesel: $5.67 (⬆️ $1.81 since war began)

-- NBC News (@NBCNews) May 6, 2026

In February, before the effects of the Iran war were felt on the U.S. economy, trailing 12-month inflation came in at 2.4%. One month later, it had jumped 90 basis points to 3.3%.

To make matters more precarious, it often takes a few months for the inflationary effects of energy price shocks on businesses to show up in economic data. This implies that a second inflationary surge should be expected in the coming months.

While inflationary pressures are a huge concern at the moment because they could prompt the Federal Reserve to shift away from its monetary easing bias, it's the historical performance of the stock market following certain geopolitical events that should be raising eyebrows.

In late February, Carson Group's Chief Market Strategist, Ryan Detrick, posted a data set to X (formerly Twitter) that detailed the S&P 500's performance following 43 market shock events since the start of 1940. The silver lining of Detrick's data set is that most major shocks and geopolitical events are much ado about nothing, with the S&P 500 higher one year later 65% of the time.

Here's a list of major geopolitical events since WWII.

Up a median of 5% six months later. All of them felt really bad at the time. pic.twitter.com/Jb3QXL0L05

-- Ryan Detrick, CMT (@RyanDetrick) February 28, 2026

But several instances in which the S&P 500 reacted negatively shared one common theme: energy supply disruptions.

For example, the five-month oil embargo in October 1973 kicked off a 43% peak-to-trough decline in Wall Street's benchmark index. Likewise, Iraq's invasion of Kuwait in August 1990 sent the S&P 500 lower by double-digits in just three weeks. Although energy supply shocks don't guarantee significant downward moves in the Dow, S&P 500, and Nasdaq Composite, they're the one geopolitical event more likely to lead to a substantial move lower.

In other words, don't rule out the possibility of a stock market crash, even with the S&P 500 and Nasdaq Composite hitting new highs.

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 a disclosure policy.