Will the stock market soar or crash under President-elect Donald Trump?Here’s what history tells us.

S&P500 (^GSPC -1.11%)is widely viewed as a barometer for the overall U.S. stock market and is up 26% since the beginning of the year. This puts the index on pace to return more than 20% for the second year in a row, a performance it continued during the dot-com bubble of 1997 and 1998.

Factors contributing to this increase include a resilient labor market, slowing inflation, and strong corporate earnings growth. Enthusiasm for artificial intelligence (AI) is also playing a big role in the S&P 500 index’s rise. But investors are now looking to 2025 and wondering how the market will perform when President-elect Donald Trump returns to the White House.

History offers a variety of insights. On the other hand, the S&P 500 performed very well during President Trump’s first term, and some analysts expect deregulation and tax cuts to lead to strong returns in his second term. There is. Meanwhile, the S&P 500 is currently trading at a premium valuation, suggesting turmoil in the coming months and years.

Here’s what investors need to know.

During President Donald Trump’s first term, the S&P 500 returned 70%.

Investors should keep in mind that the president does not control the stock market. However, you can make an impact by creating policies that affect the economy. For example, Donald Trump signed the Tax Cuts and Jobs Act of 2017 during his first term as president. In addition to reducing personal taxes, this law also lowered the corporate tax rate to its lowest level since 1939.

Lower taxes mean more disposable income for consumers and higher profit margins for businesses, both of which tend to boost spending and economic growth. In fact, U.S. gross domestic product (GDP) grew at an annualized rate of 2.7% from 2017 to 2019, higher than the 1.5% average over the past decade. Of course, GDP in 2020 plummeted during the early stages of the COVID-19 pandemic, but the stock market quickly soared after the initial plunge, delivering extraordinary returns during the first four years of the Trump administration.

Specifically, the S&P 500 index rose 70% during this period, which equates to 14.1% annually. This is significantly higher than the long-term average of approximately 7% per year. In fact, the S&P 500 index performed better under President Trump than under any president except Bill Clinton since its creation in 1957, as shown below.

Data source: YCharts, The American Presidency Project. Note: Most presidential earnings are measured from Inauguration Day to the next Inauguration. Exceptions include the assassination of John Kennedy and the resignation of Richard Nixon.

Donald Trump will inherit an even more expensive stock market in 2025

As of Dec. 20, the S&P 500’s price-to-earnings ratio was 22.2 times, according to Yardeni Research. Outside of this year, April 2021 was the last time the benchmark index traded at such a high valuation, according to FactSet Research.

From 1980 to this year, there were only two general periods in which the S&P 500’s forward P/E exceeded 22 times. The first time was the dot-com bubble and its aftermath, when it exceeded that level for an extended period of time. The second time was during the first year or so of the COVID-19 pandemic, when temperatures hovered around 22 degrees and occasionally exceeded that (again, most recently in April 2021). In both cases, long periods of rally ended in sharp declines. It was nearly 50% when the dot-com bubble burst, and just over 25% during the 2022 bear market.

Based on the relationship between future P/E ratios and subsequent stock market performance, current multiples imply a return of 3% annually over the next three years, said Torsten Slok, chief economist at Apollo Global Management.

Donald Trump addressed the press during his first term as president. Official White House photo by Sheila Craighead.

Importantly, when Trump first took office in 2017, the S&P 500 had a forward P/E ratio of about 17x, but until the pandemic hit, that multiple had typically remained below 18x. That means Trump will inherit a more expensive stock market this time around, which could mean the S&P 500 will perform much worse than it did under the first president.

Investors can prepare for that possibility by tempering expectations, paying attention to valuations, and building larger-than-usual cash positions in their portfolios. Remember, the S&P 500 has historically had a correction about once every two years and experienced a bear market about once every six years. However, drawdowns are always buying opportunities, and investors with cash on hand can take advantage of the next drawdown whenever it occurs.