How Likely Is it That the Stock Market Crashes Under President Donald Trump? 2 Historically Flawless Prediction Tools Offer a Blunt Answer.

Outsize stock market returns have been a theme with President Donald Trump in the White House. The iconic Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and innovation-driven Nasdaq Composite (NASDAQINDEX:^IXIC) rallied 57%, 70%, and 142%, respectively, during his first non-consecutive term, and have gained 18%, 30%, and 40% since the start of his second term.

Trump's presidency has benefited from the artificial intelligence (AI) infrastructure build-out, better-than-expected corporate earnings, and record S&P 500 share repurchases. The latter has been fueled by the president's flagship tax-and-spending law from his first term, the Tax Cuts and Jobs Act, which permanently lowered the peak marginal corporate income tax rate to 21%.

Image source: Official White House Photo by Patrick B. Ruddy.

But things may not be as rosy as Wall Street's major stock indexes indicate. Although history can't concretely predict what's to come, past events have a knack for foreshadowing big moves in the Dow, S&P 500, and Nasdaq Composite.

Right now, two prediction tools, neither of which has ever been wrong, point to a significant forthcoming decline in stocks under President Trump.

A historically pricey stock market portends disaster

Perhaps the most visible concern for the bull market that's flourished under President Trump since his second term inauguration is stock valuations.

Valuing individual stocks and the broader market is particularly tricky because there isn't a step-by-step blueprint for doing so. Investors' emotions and subjectivity often come into play, making it especially challenging to predict short-term directional moves in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.

But the one time-tested valuation tool that's demonstrated its ability to cut through this emotion and subjectivity is the S&P 500's Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio). Currently, the Shiller P/E Ratio is making dubious history.

Stock Market Shiller PE Ratio on the verge of taking out its Dot Com Bubble all-time high 🚨 🤯 👀 https://t.co/CtCmSgWnLt

— Barchart (@Barchart) July 11, 2026

Though economists introduced the Shiller P/E less than 40 years ago, it's been backtested nearly 156 years to January 1871. Over this time frame, the Shiller P/E Ratio has averaged 17.42. As of the closing bell on Oct. 7, this premier valuation tool had a multiple of 41.80, with the evolution of AI powering stock valuations into the stratosphere.

Over the last 156 years, the CAPE Ratio has exceeded 30 for at least two consecutive months only six times, including the present. The previous five instances all portended disaster for the stock market. Premium valuations were observed before the start of the Great Depression and the bursting of the dot-com bubble. The Great Depression wiped away 89% of the Dow's value, while the dot-com bubble slashed the S&P 500 and Nasdaq Composite by 49% and 78%, respectively.

History shows that premium stock valuations aren't sustainable over an extended timeline. While the CAPE Ratio can't pinpoint when the music will stop, nor can it guarantee that a stock market crash will occur, it has successfully portended five significant downturns over the last century.

In other words, the second-priciest CAPE Ratio in history increases the odds that the stock market crashes under Donald Trump.

Image source: Getty Images.

Risk-taking has gone parabolic, and that's terrible news for stocks

However, the S&P 500's Shiller P/E Ratio isn't the only predictive tool that has a flawless track record of foreshadowing the future. One of Wall Street's crudest measures of risk-taking, outstanding margin debt, is also sending all the wrong signals.

Margin represents the money an investor borrows from their broker, with interest, to wager against (short-sell) or purchase securities. If margin is used to purchase a stock, it acts as a form of leverage and is therefore a crude measure of an investor's willingness to take risks.

On the one hand, if a security moves in the desired direction, margin can amplify an investor's gains. But if it moves opposite to what was expected, margin debt can quickly magnify losses. When coupled with owing interest, using margin can be quite risky.

Nevertheless, outstanding margin debt across all brokers, reported monthly by FINRA, is expected to steadily rise over time in lockstep with the overall stock market. In those rare instances when outstanding margin debt goes parabolic (i.e., when risk-taking dramatically increases), history shows that things tend to break.

BREAKING: US margin debt surged +$37 billion in August, to $1.45 trillion, its 2nd-highest on record. Margin debt has risen +$228 billion year-to-date, or +19%. Since the end of 2022, investor borrowing has soared a massive +$847 billion, or +140%. This has significantly outpaced the S&P 500's gain of +98% over the same period. At the same time, margin debt as a % of GDP has almost doubled, to a record 4.5%. By comparison, the 2021 and 2000 Dot-Com Bubble highs were 3.6% and 2.8%, respectively. Investor leverage is through the roof.

— The Kobeissi Letter (@KobeissiLetter) September 17, 2026

Over the last 30 years, there have been four instances, including the present, in which outstanding margin debt has surged by at least 65% over a relatively short time frame:

• March 1999 to March 2000: Margin debt up 80% to nearly $300 billion
• June 2006 to July 2007: Margin debt soared 66% to around $416 billion
• March 2020 to October 2021: Margin debt skyrocketed 95% to roughly $936 billion
• April 2025 to June 2026: Margin debt surged 77% to a record $1.502 trillion

The previous three events immediately preceded the bursting of the dot-com bubble, the financial crisis, and the 2022 bear market.

When risk-taking soars, to borrow a phrase from Warren Buffett, the "time to be fearful when others are greedy" has arrived.

Although outstanding margin debt, like the Shiller P/E Ratio, can't tell us precisely when downturns will begin or if these downturns will come in the form of a stock market crash, surging margin debt has historically correlated with some short-lived crash events. It would appear that the odds of a stock market crash under President Trump are rising.

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.