Assessing the 2026 Stock Market Crash Risk Under President Trump: Three Historical Correlations to Watch

The S&P 500's recent performance has set the stage for a critical question: Is a market correction or crash in 2026 under President Donald Trump's administration a looming inevitability or a speculative overreaction? To answer this, investors must grapple with three historically significant correlations-triple-digit market streaks, elevated Shiller P/E valuations, and midterm-year volatility. These factors, when analyzed through the lens of past market behavior and current economic conditions, reveal a complex but cautionary picture.

1. Triple-Digit Streaks and the "Fourth-Year Curse"

The S&P 500 has now posted three consecutive years of double-digit gains (2023–2025), marking its eighth such streak since 1926. While this might seem like a sign of sustained momentum, history suggests a pattern of volatility in the fourth year. For instance, the 1929 crash followed a similar triple-digit run, as did the 2022 bear market, which erased 20% of the index's value after a 2021 surge. Conversely, the market has also rebounded strongly in the fourth year, as seen in 1945 and 1998.

The inconsistency of these outcomes underscores a key takeaway: prolonged gains often create fragile conditions. When investor optimism becomes overextended, even minor macroeconomic shifts-such as a rise in interest rates or geopolitical tensions-can trigger a sharp reversal. Under Trump's leadership, policies like aggressive tax cuts and deregulation may further amplify this fragility, particularly if they exacerbate inflation or fiscal imbalances.

2. Shiller P/E Valuations: A Red Flag or a Mirage?

By the end of 2025, the S&P 500's Shiller P/E ratio had climbed to 40.23, a level last seen during the dot-com bubble. This metric, which averages earnings over a 10-year period, is widely regarded as a barometer of long-term overvaluation. Academic studies on complex systems suggest that such extremes often precede market corrections, as investor behavior shifts from rational analysis to herd mentality.

However, the market's response to high valuations is not deterministic. For example, the 1998 Shiller P/E of 35.5 was followed by a decade of gains before the 2000 crash. Similarly, the 2025 reading could persist if earnings growth outpaces expectations, particularly in AI-driven sectors. Yet, with AI capital expenditures already straining tech firms' balance sheets- OpenAI alone is projected to burn $17 billion in 2026-the sustainability of current valuations remains questionable.

3. Midterm-Year Volatility and Trump's Policy Uncertainty

Midterm election years have historically been volatile, with an average peak-to-trough correction of 17.5% since 1950. This pattern is amplified under Trump, whose policies-ranging from tariffs to regulatory rollbacks-introduce a layer of unpredictability. For instance, the Supreme Court's pending decision on the legality of Trump's tariffs could trigger a fiscal shock if levies are ruled unconstitutional, forcing refunds and increasing capital costs.

Moreover, Trump's 2026 tax cuts, while boosting short-term consumer spending, may strain long-term fiscal health. The One Big Beautiful Bill Act's extensions have already fueled corporate earnings, but if economic growth falters, the resulting fiscal drag could mirror the 2022 slowdown. This dynamic is particularly concerning for growth stocks, which have thrived on low-interest-rate environments and may struggle if borrowing costs rise.

Conclusion: Navigating the Risks

While no single factor guarantees a 2026 market crash, the convergence of triple-digit streaks, overvaluation, and midterm-year volatility creates a high-risk environment. Investors should remain vigilant about sector-specific vulnerabilities-particularly in AI and discretionary consumer stocks-and consider hedging strategies to mitigate potential downturns.

Ultimately, the market's behavior under Trump will hinge on how these historical patterns interact with real-time policy decisions and global economic shifts. As the year unfolds, monitoring the Shiller P/E, tariff rulings, and AI sector performance will be critical for assessing whether 2026 becomes another chapter in the market's cyclical history or a new paradigm of stability.