This Back-Tested Stock Market Valuation Tool Shows Trump's Bull Market is Nearing Its End

US President Donald Trump is among the few presidents under whom stock markets have rallied strongly to reach record highs. US equity indexes surged in 2025 to new highs and continued the trend until the Middle East conflict began in late February of this year.

The Trump-driven bull market survived multiple scares over the past year, as multiple catalysts, including artificial intelligence (AI), continued to push stock prices higher. During his first term, Trump's flagship Tax Cuts and Jobs Act also gave public companies the option to change how they reward shareholders, as the new law trimmed the peak marginal corporate income tax rate to 21% from 35%.

Higher earnings retention triggered a wave of share buybacks among S&P 500 companies. For companies with stable or growing net income, buybacks can boost their earnings per share and likely lower their price-to-earnings (P/E) ratio. In simple terms, share repurchases can make companies more lucrative for value investors.

However, a time-tested market prediction tool is signalling the end of the market rally under Trump's second term in office.

When you think of company valuation, the P/E ratio is the first thing that comes to mind because it offers investors a quick way to gauge mature businesses. For instance, the price-to-earnings (P/E) ratio is generally higher for growth stocks, meaning that you might be paying much more to buy the stock. However, if earnings per share turn negative, the P/E ratio loses its usefulness.

The Shiller P/E Ratio

The S&P 500's Shiller P/E ratio, also known as the cyclically adjusted P/E ratio (CAPE ratio), could offer a clearer picture of company valuations. Although introduced by economists in the late 80s', the CAPE ratio has been back tested to 1871. The ratio has averaged a multiple of 17.35 over the past 150 years, but has ranged between 39 and 41 in the past five months.

The traditional P/E ratio is based on trailing 12-month EPS, but the Shiller price-to-earnings (P/E) is based on average inflation-adjusted EPS over the trailing decade.

The CAPE ratio rose above 30 for at least 2 months during bull markets on only 6 occasions, including the present. The five other occurrences were followed by significant fluctuations in US equity indexes.

The Shiller P/E surged beyond 40 three times, including the present market. Note that when the Shiller P/E ratio peaked at 44.19 in December 1999, it was followed by the S&P 500 and Nasdaq Composite losing 49% and 78% of their respective value during the dot-com bubble.

The ratio rose above 40 in early January 2022, triggering a nine-month bear market that wiped out a quarter of the S&P 500's value.

In all, an expensive stock market, coupled with headwinds such as a divided United States Federal Reserve on rate cuts and higher inflation from the Middle East conflict, provides a recipe for the Trump bull market to end.

Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.