Donald Trump’s return to the White House has investors and business leaders closely watching how the stock market will react. History shows mixed results, with both optimism and caution warranted. During Trump’s first term from 2017 to 2021, the S&P 500 saw impressive gains of 70%, averaging an annual return of 14.1%.
This was largely driven by the 2017 Tax Cuts and Jobs Act, which slashed corporate tax rates to their lowest level since 1939. The U.S. economy grew at a healthy pace during this period, despite the initial impact of the COVID-19 pandemic. However, the current economic landscape presents challenges.
The S&P 500 trades at a high forward price-to-earnings ratio of 22.2, raising concerns about potential market turbulence. Torsten Slok, Chief Economist at Apollo Global Management, predicts modest annualized returns of just 3% over the next three years based on these valuations.
Investors wary of economic turbulence
Investors may need to temper their expectations and prepare for potential market corrections. Building larger cash positions and staying vigilant for buying opportunities during market drawdowns could be wise strategies. Research shows that while markets initially cheer the return of right-wing populists, the euphoria is often short-lived.
Populist policies, such as tariffs and unfunded tax cuts, may provide short-term benefits but can lead to long-term economic damage. The bigger risk lies in the threat populists pose to institutions. Undermining independent courts, central banks, and regulators can erode investor confidence and hinder long-term business planning.
As Trump takes office, investors are betting on corporate tax cuts and hoping he won’t follow through on the global tariffs threatened during his campaign. The stock market’s performance under the new administration will depend heavily on the policies implemented and their impact on the economy and institutions.
