Valuation Pressures and Political Cycles Intertwined: Is the Trump-Era US Stock Bull Market Really Ending?

TradingKey - From a market performance perspective, Trump's presidential terms have consistently been accompanied by strong rallies in U.S. equities. During his first term from January 2017 to January 2021, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite rose by 57%, 70%, and 142%, respectively; since his second term began in January 2025, the three major indices have collectively recorded gains of 14%-15%.

While most presidents witness stock market gains during their tenures, the annualized returns of U.S. stocks during Trump's administration rank the highest among all presidents in over a century of history.

It is worth noting that the catalysts for this bull market possess both policy and technological attributes; the policy orientation of the Trump administration, combined with breakthroughs in frontier technologies such as artificial intelligence and quantum computing, have jointly driven stock indices to repeated record highs.

However, high valuation pressures in the U.S. stock market and political uncertainty could emerge as potential variables that disrupt the upward momentum.

There is no definitive answer as to whether the U.S. stock market will experience a crash in 2026, but historical data and current signals have provided a reference perspective for investors.

Multiple Drivers Behind Record Highs in U.S. Stocks

One of the core engines driving the U.S. stock market is the massive market potential created by the revolution in frontier technologies such as artificial intelligence and quantum computing.

PwC predicts that artificial intelligence will create $15.7 trillion in value for the global economy by 2030. The development of AI technology has not only directly fueled soaring valuations for related companies but has also reshaped growth expectations for the entire market, igniting long-term investor enthusiasm.

On a micro level, the commercialization of artificial intelligence is progressing at a staggering pace, with data center construction in full swing, chip giants continuing to increase capital expenditures, and AI startups consistently securing massive funding.

Federal Reserve data shows that from the second to the fourth quarter of 2025, data center construction had a significant stimulative effect on U.S. GDP growth, with GDP growth rates reaching 3.8%, 4.4%, and 1.4% during those periods, respectively.

Large technology companies have announced over $600 billion in cloud infrastructure investment plans this year, almost entirely centered on AI demand; this has directly driven demand growth in upstream and downstream industries such as raw materials, chips, labor, and electricity, becoming a key force driving the U.S. economy and stock market. The strong performance of global market-cap giants like NVIDIA is a direct reflection of this AI revolution.

The Federal Reserve's sustained cycle of loose interest rates has also provided significant support for the bull market. Although the FOMC's interest rate decisions are independent of the President, a low-interest-rate environment does stimulate corporate borrowing, encouraging companies to increase hiring, M&A investment, and innovation capital, thereby driving earnings growth. This accommodative monetary policy environment has created favorable liquidity conditions for the stock market rally.

Policy initiatives by the Trump administration have also injected direct momentum into the stock market rally. The Tax Cuts and Jobs Act, introduced during his first term, permanently reduced the top marginal corporate income tax rate from 35% to 21%, the lowest level since 1939.

This policy directly increased retained profits for corporations, driving a significant surge in quarterly share buybacks among S&P 500 companies. S&P Dow Jones Indices predicts that cumulative share buybacks by S&P 500 companies will exceed $1 trillion by 2025. For companies with stable or growing earnings, buybacks can effectively boost earnings per share (EPS), enhancing the stock's appeal to value investors.

However, the current AI fever in U.S. stocks inevitably brings to mind the dot-com bubble of 1999. Many analysts are warning investors to remain vigilant against a potential "AI bubble."

Historical lessons suggest that an AI bull market could face similar risks; if spending on AI data centers hits a peak and then declines, it will directly impact GDP growth, the earnings performance of tech giants, and labor market vitality, subsequently triggering a stock market correction.

The Warning of the Shiller PE Ratio

While backtesting datasets and related events cannot guarantee future performance, they do help eliminate the influence of emotional factors, allowing investors to view the stock market objectively.

A valuation metric validated by 155 years of historical backtesting clearly points to an ending trend for the Trump bull market: the Shiller PE Ratio (CAPE Ratio, or Cyclically Adjusted Price-to-Earnings Ratio).

Unlike the traditional PE ratio (based on the trailing 12-month earnings per share), the Shiller PE ratio uses average inflation-adjusted earnings from the past 10 years. This method smoothes the impact of short-term shocks and recessions on earnings through long-term data, more accurately reflecting the market's true valuation level.

Since 1871, the historical mean of the Shiller PE ratio has been 17.34. Although the metric has remained above the mean for the past 30 years due to declining interest rates and increased information transparency brought by the internet, the current level has far exceeded a reasonable range.

For the past four months, it has remained between 39 and 41, the second-highest valuation level in history, trailing only the dot-com bubble era. Historical data shows that instances where the Shiller PE ratio exceeded 30 have occurred only six times in the past 155 years, and the previous five occurrences were all accompanied by significant declines in the three major indices.

Market Risks Posed by the Midterm Elections

In addition to valuation pressures, the upcoming midterm elections in November have also become a potential risk factor for the market.

At the start of Trump's second term, the Republican Party held majorities in both the Senate and the House, but historical patterns show that the incumbent president's party typically loses congressional seats in the midterm elections. Given the Republicans' slim majority in the House, even small shifts in election results could lead to a divided Congress, significantly reducing the likelihood of Trump advancing major legislation during the remainder of his term.

Data released on X by Ryan Detrick, Chief Market Strategist at Carson Investment Research, shows that stock market corrections in presidential midterm election years are typically larger than in other years.

Since 1950, the average drawdown (peak-to-trough) for the S&P 500 in midterm election years has reached 17.5%, nearing bear market territory; during the midterm elections of Trump's first term, the S&P 500 experienced a decline of nearly 20%.

The uniqueness of 2026 lies in the fact that two major risks—high valuations and political uncertainty—are appearing simultaneously for the first time. Historical data indicates that when the market faces both factors at once, more significant corrections typically occur.