For more than a century, no other asset class has come particularly close to matching the annualized return of stocks. However, this doesn't mean Wall Street's journey from Point A to B is a smooth one.
Since 2025 began, the benchmark S&P 500 (^GSPC +0.58%), innovation-fueled Nasdaq Composite (^IXIC +1.20%), and ageless Dow Jones Industrial Average (^DJI 0.14%) have navigated their way through extremes. For example, between the closing bell on April 2 and April 9, the S&P 500 endured its fifth-largest two-day percentage decline (-10.5%) since 1950, as well as logged its largest single-day point gain since its inception.
Though volatility is always present on Wall Street, and can be thought of as the price of admission to one of the world's greatest wealth creators, bouts of heightened volatility often tug on investors' heartstrings. With the primary catalyst for the late March-early April swoon in the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average being President Trump's "Liberation Day" tariff and trade policy announcement, we have to ask: Is Round 2 of a "Trump dump" imminent for stocks?
President Trump delivering his State of the Union address. Image source: Official White House Photo.
Liberation Day 2.0 is almost here -- should investors be worried?
Following the close of trading on April 2, which is the day Trump referred to as America's Liberation Day in social media posts, the president unveiled his tariff and trade policy. He introduced a baseline 10% global tariff, as well as higher "reciprocal tariff rates" on dozens of countries that have, historically, run unfavorable trade imbalances with America. This announcement is what precipitated the S&P 500's greater-than-10% tumble in two days.
One week later, Donald Trump paused these reciprocal tariffs for 90 days (until July 9), which is what sent the S&P 500, Nasdaq Composite, and Dow screaming higher. Just two days before the expiration of this 90-day pause, President Trump signed an executive order extending the reciprocal tariff pause until Aug. 1. This makes the first day of August Liberation Day 2.0 for the Trump administration... and Wall Street.
But does this mean stocks will have the same reaction nine days from today as they had during the first week of April?
Based on what history tells us, weakness has been the norm when President Trump initially announces and/or implements tariffs; but another "Trump dump" of stocks seems unlikely.
In December, four New York Federal Reserve economists at Liberty Street Economics published a report, "Do Import Tariffs Protect U.S. Firms?," that analyzed the impact of Trump's China tariffs in 2018-2019 on publicly traded companies.
Perhaps the least-surprising of all takeaways was that companies exposed to Trump's previous China tariffs notably underperformed those with no exposure on tariff announcement days.
However, the more meaningful conclusion from Liberty Street's analysis is that firms with exposure to Trump's China trade-war tariffs had worse future real outcomes than businesses with no exposure. Between 2019 and 2021, labor productivity, sales, employment, and profits, on average, fell across the board for companies exposed to Trump's tariffs. This suggests that while a Trump dump of stocks may not be imminent, a more drawn-out headwind from tariffs may come into play.
Wall Street has a bigger concern than Trump's tariffs
Although President Trump's tariff and trade policy is headline news, an argument can be made that tariffs aren't the biggest threat to the current bull market. Rather, it's the stock market's historically pricey valuation.
To address the elephant in the room, "valuation" is something of a subjective term. What you believe to be pricey might be viewed as a bargain by another investor. It's one of the factors responsible for making the stock market a "market."
But in this particular instance, one of Wall Street's tried-and-true valuation tools leaves little wiggle room that the stock market is exceptionally pricey.
S&P 500 Shiller CAPE Ratio data by YCharts.
In December, the S&P 500's Shiller price-to-earnings (P/E) ratio (also known as the cyclically adjusted P/E ratio, or CAPE Ratio), hit 38.89, which is its highest multiple in the current bull market, and the third-priciest multiple during a continuous bull market when back-tested to January 1871. The Shiller P/E is based on average inflation-adjusted earnings over 10 years, which ensures that shock events (e.g., COVID-19 lockdowns) aren't able to skew the results.
To put into perspective how far outside of historic norms the current Shiller P/E of 38.37 is (as of the closing bell on July 18), it represents a 122% premium to the average multiple of 17.26 over the last 154 years.
Furthermore, this time-tested valuation tool has only experienced six instances since 1871 where it's surpassed a multiple of 30 and held this level for at least two months, including the present. The previous five occurrences were all, eventually (key word), followed by pullbacks in the S&P 500, Nasdaq Composite, and/or Dow Jones Industrial Average ranging between 20% and 89%.
What history tells us is that, while it's impossible to pinpoint stock market tops, valuation premiums aren't tolerated over long periods. Though it's possible Liberation Day 2.0 serves as a downside catalyst for Wall Street, premium valuations are the greater threat for stocks.
Image source: Getty Images.
Time can trump tariff- and valuation-related uncertainty
If history were to rhyme or repeat, the stock market's major indexes could endure some modest downside. Thankfully, history and time are undeniable allies of optimistic, long-term-minded investors.
At any given time, there will always be one or more headwinds threatening to send stocks lower. Sometimes these potential headwinds are front-and-center, such as President Trump's tariffs. Other times, these factors crop up without warning, just as we witnessed during the COVID-19 pandemic.
Stock market corrections, bear markets, and even occasional elevator-down crashes in the S&P 500, Nasdaq Composite, and Dow Jones are normal and inevitable events. But something else that's proved inevitable is the expansion of the U.S. economy, growth in corporate earnings, and eventual new highs for Wall Street's major stock indexes.
Every year, the analysts at Crestmont Research update a published data set that examines the rolling 20-year total returns, including dividends, of the broad-based S&P 500 dating back to the start of the 20th century. Even though the S&P wasn't officially incepted until 1923, Crestmont was able to track the performance of its components in other major indexes dating back to 1900. The resulted in 106 rolling 20-year periods of total return data (1900-1919, 1901-1920, and so on, to 2005-2024).
^SPX data by YCharts. The above chart only goes back to the start of 1950.
Despite some of these rolling 20-year periods navigating wars, depressions, pandemics, and various bubbles, all 106 rolling 20-year timelines would have produced a positive annualized total return for investors. In other words, if an investor had, hypothetically, purchased an S&P 500 tracking index and held thee position for 20 years, that person made money, without fail, every time.
What's more, investors wouldn't have been eking out small gains during these 20-year stretches. About half of these 106 periods examined generated annualized returns ranging from 9.3% to 17.1%. Annualized returns of this magnitude can double your money every four to eight years.
Even if Donald Trump's tariff and trade policy throws a monkey wrench into the current bull market, it would likely be short-lived and represent an opportunity to invest for the long-term at a discounted price.
