The S&P 500 CAPE (Cyclically Adjusted Price-to-Earnings) ratio, a metric developed by economist Robert Shiller, measures stock market valuation by averaging earnings over the past ten years and adjusting for inflation. It provides a long-term perspective on whether the market is overvalued or undervalued compared to historical norms. As shown in Charlie Bilello’s most excellent chart, Trump 2 begins its administration in 2025 with a CAPE ratio 37.8, the highest in modern history, surpassing the peak valuation under George W. Bush’s first term in 2001.

This record-high CAPE ratio signals a challenging environment for generating positive and above-average equity market returns. Historically, elevated CAPE ratios have been associated with subdued long-term returns as high valuations leave little room for further expansion. The U.S. stock market has consistently priced in robust corporate earnings growth, but achieving these growth rates becomes harder when valuations start at such lofty levels. In this context, the Trump 2 administration faces a critical test: steering economic policies to sustain market confidence amid such expensive conditions.

As highlighted in our recent analysis, “Presidential Stock Returns,” the new administration will likely depend on a higher-than-average inflation environment to maintain stock market momentum. A moderate increase in inflation can benefit equities by supporting corporate revenue growth, but excessive inflation risks eroding consumer purchasing power and undermining profitability. Striking this delicate balance is vital.

The data also contextualizes broader market trends. For example, CAPE ratios were substantially lower during economic recoveries such as under FDR in 1933 (7.9) or Reagan in 1981 (9.3). In contrast, the elevated valuations of 2025 reflect an era of expansive monetary policies and tech-driven growth expectations, further emphasizing the risks and constraints the administration will need to navigate. This market landscape leaves little margin for policy or economic missteps.