Section 1: Introduction
In my WSJ 2025 Economic Survey and Forecast Outlook, the main economic concern is the uncertainty of Trump 2.0. Uncertainty was also the core message of the 2025 UCLA Economic Forecast (click here to review research, Outlook). In my November Market Outlook, I came up with the same conclusion: there is too much uncertainty to make a forecast. (Click here to review my November Outlook, research).
The last section of this outlook is a review of Trump 2.0 from the research that I’ve done. There remains uncertainty because of the ambitious nature of Trump 2.0 and how it could change the U.S. and the world, especially economically.
Below is a chart that shows the market action during Trump 1.0:
Let’s review the chart:
- There was a Trump bump (First Rectangle) when President Trump won the Presidential election in November 2016. Investors turned optimistic with a business man as President and the prospects for tax cuts and reduced regulations.
- Markets rallied again when the President’s tax cuts were passed toward the end of 2017. (Second Rectangle).
- In 2018, 2019 trade wars occurred especially with China. This caused increased market volatility. (Third Rectangle).
- Covid happened at the start of 2020, and the shutdown of the global economy caused the global economy and markets to collapse.
- With the shutdown of the global economy that almost caused a global depression the administration issued trillions of dollars of support and aid to workers, and some institutions such as libraries, museums… to help them financially get to the other side of the pandemic. They made the choice of potential inflation versus a potential depression. The Biden administration also provided trillions of dollars of aid and support.
Below is a current market chart for Trump 2.0
There are many differences between Trump 1.0 and Trump 2.0. In Trump 1.0, the tax cuts that gave the economy a bump came first. The economy in 2018 was on a stronger footing allowing the trade wars, especially with China. The tax cuts from 2017 sunset next year and a new tax bill will be introduced later this year. This means work on tariffs comes before the new tax bill and unfortunately, the global economy is weaker.
Some economists and analysts are forecasting stagflation (a stagnant economy with inflation)/ a recession. The markets are trying to adjust to the potential weakening of the U.S. and global economies.
The market is trying to find a bottom, participants have bought the latest bottom.
If we have a bear market, at least a 20% decline from a previous high, the market could pull back to 4,920 [(6150 peak x 100% peak)- 20% loss].
The President and his economic team admit there could be “some short-term pain”. During this transition period. Again, more on the goals objectives of Trump 2.0 are at the end of this Outlook.
Valuations
I’ve written about the need for a “margin of safety” when investing. Graham and Dodd’s seminal book Security Analysis has the best description of the “margin of safety”. This means focusing on the fundamentals of a company especially valuations, liquidity, debt, profit margins…
The P/E is around historical highs. The P/E is a good, simple metric to determine valuations. It tells how much investors are willing to pay for a dollar of earnings.
Here are the P/Es for the markets:
Source: WSJ
The Dow 30 P/E is around 19.70 and the S & P’s P/E is about 21. Below is a historical chart of the P/E. The average is about 15.62. Today’s P/Es are significantly higher. Historical investors have paid about 15.62 for a dollar of earnings. Today investors are willing to pay about $21 for a dollar of earnings.
Notice the decline in prices for both indexes. The S & P then was over 22, the index was overvalued with no margin of safety.
Here is the historical trend for P/Es: