Is the Stock Market at Risk of Another Lost Decade? Here's What History Shows.

Stocks may have bounced off their post "Liberation Day" lows, but an unusual level of uncertainty remains for many investors. There's little clarity as to what tariff rates will end up being under the Trump administration, and nearly every day, news reports hint at more changes. The current 145% tax on most imports from China doesn't seem sustainable, but predicting where it settles from here is nearly impossible.

There are other signs that investors could be facing more challenges ahead. Consumer sentiment and business sentiment are rapidly weakening. Inflation expectations are now the highest they've been since 1981, with inflation expected to rise to 6.7%, according to a survey from the University of Michigan. The Gross Domestic Product (GDP) report for the first quarter of 2025 came out this week, and it contracted for the first time since early 2022, when the economy was still being heavily affected by the pandemic.

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Long-term investors know that the stock market has a history of bouncing back from a wide range of shocks, including depressions, world wars, political crises, and natural disasters. After 150 years, the record is clear. The U.S. stock market can recover and continue to grow. However, those recoveries can take time.

Twice in the last 50 years, investors have experienced a lost decade, or a period of roughly 10 years when the stock market went nowhere. This happened most recently in the 2000s as the combination of the dot-com bust and the financial crisis cost investors roughly 12 years. Through much of the 1970s and early 80s, stocks went nowhere as well due to the energy crisis and stagflation.

Given the uncertainty around trade policy and rapidly weakening sentiment, it doesn't seem farfetched to wonder if another lost decade is a possibility.

1 reason things could get worse

The greatest challenge facing the stock market might not even be trade policy or worries about a recession, but instead the market's lofty valuation.

Data by YCharts.

As you can see, with the exception of the spike early in the pandemic, the S&P 500 (SNPINDEX: ^GSPC) is more expensive than it's been at any time in the last decade.

Using the S&P 500 Shiller CAPE ratio, the issue is even more starkly illustrated.

Data by YCharts.

The high valuation of the S&P 500 puts pressure on stocks to fall further as investors had been expecting a continuing rally based on the continued growth related to artificial intelligence (AI) and on President Donald Trump's deregulation platform. Instead, there's now a significant risk of a recession.

Why it's still a good time to buy

Despite the hemming and hawing over tariffs and sentiment, the stock market is still on solid footing, and the recent sell-off was driven almost entirely by President Trump's tariffs. For instance, stocks soared when he announced a 90-day pause on his "reciprocal tariffs" and the stock market could jump again if the U.S. and China reach a detente in their trade war.

Additionally, while sentiment is souring rapidly, the hard data on things like inflation and the job market remain strong, indicating that the economy is solid for now.

Long-term investors should also remember that the last two lost decades were followed by soaring stock markets when they finally ended, showing that the pendulum tends to swing back in the other direction after weakness, and the subsequent bull markets made up for the lost years.

For now, no one knows where the stock market is headed in the short term, but investors have historically been rewarded for buying when stocks are down, and that should hold up this time as well.

No matter what happens with trade policy or economic growth, the tailwinds of new technology like AI and the dynamism of the American economy should drive the S&P 500 higher over the long term. History does repeat itself.

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Jeremy Bowman 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.