During Donald Trump's first term in the White House, the stock market soared. The ageless Dow Jones Industrial Average (^DJI 1.56%), benchmark S&P 500 (^GSPC 1.52%), and growth stock-powered Nasdaq Composite (^IXIC 1.78%) rallied 57%, 70%, and 142%, respectively.
The first year of Trump's non-consecutive second term in the White House essentially picked up where his first term ended. In 2025, the Dow Jones, S&P 500, and Nasdaq Composite, respectively, gained 13%, 16%, and 20%.
While several headwinds exist that threaten to send stocks into a full-fledged correction, bear market, or elevator-down crash in 2026, one historically flawless correlation points to a fourth consecutive year of double-digit percentage gains for the benchmark index. If this 75-year pattern were to persist, the stock market could skyrocket in the new year under President Trump.
President Trump delivering remarks. Image source: Official White House Photo by Joyce N. Boghosian, courtesy of the National Archives.
Historical precedent suggests another banner year awaits Wall Street in 2026
Before going any further, a cautionary note is warranted. Namely, what's happened in the past can't concretely guarantee what's to come. If a data point or correlated event could guarantee the future, every investor would be using it by now.
With this being said, some correlations have an uncanny track record of foreshadowing directional moves on Wall Street. It's these data points and events that can help investors optimally position their portfolios for future success.
Last week, Carson Group's Chief Market Strategist, Ryan Detrick, who, like me, is a big fan of historical correlations, made a post on X (formerly Twitter) that examined the S&P 500 returns of two-term presidents by their tenure in the White House.
Since 1950, there have been six presidents who served two terms, with Donald Trump being the only one whose term wasn't consecutive. Using data from FactSet, Detrick found that the S&P 500 produced average returns of 3.4%, 6.9%, 22.2%, 10.5%, and 15.5% during the respective first, second, third, fourth, and fifth year of a two-term president's time in office.
Year 6 of a President in office has been extremely strong for stocks.
-- Ryan Detrick, CMT (@RyanDetrick) December 31, 2025
Never lower and up nearly 21% on average. pic.twitter.com/nEYq7MmnEt
But here's where things get interesting...
Even though the sixth year of a two-term presidency is marked by midterm elections and the possibility of a congressional shake-up, all five previous two-term presidents oversaw double-digit percentage gains in the S&P 500 during year six. The average annual S&P 500 return during year six over the last 75 years is 20.9%!
For this historical correlation to come to fruition in 2026, we'd likely need to see the Federal Reserve be more aggressive with its rate-easing cycle. If the nation's central bank were to adopt a more dovish tone, we could see increased borrowing by businesses and an even greater willingness on the part of investors to accept aggressive valuation premiums.
Additionally, another year of double-digit gains for the stock market's major indexes would need to be fueled by the artificial intelligence (AI) revolution. Strong demand for AI infrastructure, coupled with growing enterprise adoption and the scaling of agentic AI, might be the spark that extends the S&P 500's bull market to a fourth year.
While the historical precedent that Detrick highlighted has, thus far, a flawless track record of forecasting the future, several stock market headwinds will put it to the test in the new year.
Image source: Getty Images.
The historical pendulum swings in both directions
Arguably, one of the biggest challenges the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite will have to overcome is the historic priciness of the stock market.
Admittedly, there isn't a stock valuation blueprint that works for everyone. Valuing companies and the market, as a whole, is a subjective process. Nevertheless, the S&P 500's Shiller Price-to-Earnings (P/E) Ratio does a remarkably good job of cutting through this subjectivity.
The Shiller P/E, also known as the cyclically adjusted P/E Ratio, or CAPE Ratio, has averaged a multiple of 17.3 since the beginning of 1871. As of the end of 2025, the CAPE Ratio clocked in at a reading of 40.23. In simple terms, this is the second priciest stock market over the last 155 years.
What history has repeatedly shown investors is that Shiller P/E readings above 30 aren't sustainable over the long run. The five previous instances where the Shiller P/E surpassed 30 were subsequently followed by declines in the Dow, S&P 500, and/or Nasdaq Composite ranging from 20% to 89%.
S&P 500 Shiller PE Ratio hits 2nd highest level in history 🚨 The highest was the Dot Com Bubble 🤯 pic.twitter.com/Lx634H7xKa
-- Barchart (@Barchart) December 28, 2025
Another historical correlation that threatens to upend Wall Street's bull market rally under President Trump is the potential for the AI bubble to burst.
Over the last three decades, numerous next-big-thing technologies have promised otherworldly addressable markets. But the only common trait among these hyped trends has been an eventual bubble-bursting event. These bubbles take shape and burst because investors consistently overestimate the adoption, utility, and optimization rate of game-changing technologies. It takes time for innovations to mature and evolve, and neither AI nor quantum computing is anywhere close to being a mature technology at the moment.
If one or more of Wall Street's hyped trends go bust, Wall Street's bull market aspirations could quickly disappear.
Even Donald Trump's tariff and trade policy provides cause for skepticism in the new year.
A report published for Liberty Street Economics in December 2024 ("Do Import Tariffs Protect U.S. Firms?") by four economists at the New York Federal Reserve examined the impact of Trump's China tariffs in 2018 and 2019 on publicly traded companies. What they found was a decisively negative impact on average labor productivity, employment, sales, and profits from 2019 to 2021 for companies directly affected by these tariffs.
Suffice it to say, the presidential year-six correlation that Detrick highlighted will be challenged in 2026.
