Despite jaw-dropping volatility at times, outsize stock market returns have been the norm with President Donald Trump in the White House. During his first non-consecutive term (Jan. 20, 2017 – Jan. 20, 2021), the time-tested Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and innovation-fueled Nasdaq Composite (NASDAQINDEX: ^IXIC) soared 57%, 70%, and 142%, respectively.
But expecting these good times to last may be a mistake — at least over the short run. Although the stock market tends to climb over long periods, a trio of headwinds appears set to make life challenging for the Trump bull market in the second half of 2026.
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1. The second-priciest stock market in history would like a word
Arguably, the biggest issue for Wall Street is justifying the second-priciest valuation in history. The S&P 500’s Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), reached as high as 42.84 in early June, which is a stone’s throw away from its all-time high of 44.19 in December 1999, mere months before the dot-com bubble burst.
Although the Shiller P/E Ratio doesn’t help identify when the music will stop on Wall Street, it does have an immaculate track record of foreshadowing eventual declines for the major indexes.
The S&P 500’s CAPE Ratio has topped 30 on six occasions over the last 155 years, and they’ve all been eventually followed by declines of 20% or more in the Dow, S&P 500, and/or Nasdaq Composite. Premium stock valuations simply aren’t well-tolerated.
2. Trumpflation forces the Fed to act
While modest levels of inflation are perfectly normal, the Trump-led Iran war has pushed U.S. inflation to a three-year high of 4.2% in May. Even if the U.S. and Iran reach a peace deal relatively soon, the effects of four months of energy supply disruption, courtesy of the Strait of Hormuz’s closure, won’t dissipate anytime soon.
The latest Summary of Economic Projections (aka, the dot plot) from the Federal Open Market Committee (FOMC) shows that half of the 18 participating members expect interest rates to rise before the end of 2026. The CME Group‘s FedWatch Tool places a 76.5% probability of at least one rate hike by the FOMC’s Dec. 9 meeting.
