President Donald Trump Just Proclaimed “Everybody’s Profiting” From the Stock Market, but He’ll Likely Regret This Remark in Short Order
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President Donald Trump Just Proclaimed “Everybody’s Profiting” From the Stock Market, but He’ll Likely Regret This Remark in Short Order
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From a statistical standpoint, President Donald Trump in the Oval Office and outsize stock market returns have gone hand in hand. During his first, non-consecutive term (Jan. 20, 2017 – Jan. 20, 2021), the time-honored Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and innovation-propelled Nasdaq Composite (NASDAQINDEX: ^IXIC) gained 57%, 70%, and 142%, respectively.
President Trump’s second term has been something of an encore performance. The Dow reached an all-time high earlier this month, while the S&P 500 and Nasdaq Composite powered to record closes in June.
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A laundry list of catalysts has lifted the broader market to new heights, including the evolution of artificial intelligence (AI), initial public offering euphoria, and record S&P 500 share buyback activity in 2025.
President Trump delivering remarks. Image source: Official White House Photo by Daniel Torok.
In response to a reporter’s question earlier this month about his personal financial gains, President Trump retorted, “You know why I’m profiting?” Because the stock market’s going up, everybody’s profiting.”
While he’s 100% correct that investors have thrived from a high-flying stock market, historical precedent strongly suggests Trump will regret proclaiming that “everybody’s profiting” in the not-too-distant future.
The second-priciest stock market in history would like a word
At any given time, the stock market has several headwinds threatening to drag it lower. For decades, Wall Street has made a habit of climbing this wall of worry and proving the naysayers wrong. While the long-term outlook for equities remains bright, the near-term isn’t as rosy, based on 155 years of historical valuation data.
To address the elephant in the room, yes, valuations are subjective. Without a one-size-fits-all blueprint for evaluating public companies, what one investor finds pricey might be viewed as a bargain by another. This seemingly limitless approach to evaluating and valuing publicly traded companies is one of the primary reasons it’s so difficult to forecast short-term directional moves in Wall Street’s major stock indexes with any sustained accuracy.
Nevertheless, the S&P 500’s Shiller Price-to-Earnings (P/E) Ratio does a sensational job of cutting through the noise and providing investors with the closest thing they’ll get to an apples-to-apples valuation comparison. You’ll occasionally see the Shiller P/E referred to as the Cyclically Adjusted P/E Ratio, or CAPE Ratio.
When back-tested to January 1871, the S&P 500’s Shiller P/E Ratio has averaged approximately 17.4. As of early June, the current bull market reached a Shiller P/E of 42.84, marking the second-highest reading spanning 155 years. The only time the stock market has been pricier was in December 1999 (44.19), mere months before the dot-com bubble burst.
Although the CAPE Ratio can’t tell investors when the stock market will top or what catalysts will prompt a stock market correction or bear market, it does have a knack for foreshadowing significant downside in equities.
Including the present, the Shiller P/E Ratio has topped 30 on six occasions. The previous five were followed by declines in the Dow, S&P 500, and/or Nasdaq Composite ranging from 20% to the 89% plunge observed during the Great Depression.
The point is that premium valuations aren’t well tolerated by Wall Street or investors. Based on what history tells us, it’s not a matter of if but when the second-priciest stock market in history rolls over in a big way.
Image source: Getty Images.
Next-big-thing innovations have a checkered past
“Everybody’s profiting” from the AI revolution, as well — but this may not be the case for much longer.
Similar to the internet, AI is a significant technological leap forward. Empowering software and systems to make rapid, autonomous decisions is a technology that PwC analysts foresee adding more than $15 trillion to the global economy by 2030. Over the next one or two decades, AI can transform corporate America and positively alter growth rates.
But according to historical precedent, the short-term outlook for the evolution of AI isn’t as bright.
Since (and including) the advent and proliferation of the internet more than 30 years ago, every game-changing innovation has navigated a bubble-bursting event relatively early in its expansion. The internet, genome decoding, business-to-business e-commerce, nanotechnology, 3D printing, blockchain technology, and the metaverse are some of the more prevalent examples of hyped trends whose bubbles eventually burst.
The reason bubbles form and burst around game-changing innovations is simple: investors constantly overestimate the pace of adoption and/or optimization of new trends.
Just like the internet in the mid-to-late 1990s, AI doesn’t have an adoption problem. Businesses welcomed the internet with open arms in the mid-1990s, just as Wall Street’s most influential businesses are currently clamoring to expand their AI infrastructure.
The problem stems from the projected optimization of AI solutions. It took until well after the dot-com bubble burst for businesses to optimize their use of the internet to boost sales and profits. Likewise, companies aren’t remotely close to optimizing AI solutions. It’ll likely take years for artificial intelligence to mature as a technology, suggesting that all the puzzle pieces for an AI bubble-bursting event are firmly in place.
While AI should be just as impactful as the internet in transforming corporate America over the long haul, expecting the Dow Jones Industrial Average, S&P 500, Nasdaq Composite, and tech stocks to maintain their breakneck parabolic climbs doesn’t align with what decades of history have taught investors.
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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.
