Why I don’t expect 2025 will be a repeat of 2017 for investors

What should we read into the Trump Bump since last week’s unexpectedly decisive Presidential election? Clearly, investors were surprised by the ease of the victory. They believe that a red sweep will pave the way for the new president to deliver more of what he has promised than would be possible under a divided government. They also remember what happened eight years ago, when the S&P 500 rose by 30% between President Trump’s win in November 2016 and the end of 2017.

History is on their side. Of the 19 elections since 1900 that have delivered single party control of all three branches of government, 15 resulted in market gains over the next two years. When the party in charge was the Republicans, the odds were even better - seven positive outcomes out of eight sweeps, with only the Hoover administration failing to make money for investors. That’s not altogether surprising, as the 1929 crash put paid to an early rally that looked suspiciously like the current one.

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For a few reasons, I don’t expect 2025 to deliver the same result for investors as 2017. Watching the US benchmark push through 6,000 for the first time, I don’t automatically assume ‘it’s morning in America again’. Rather I worry that we have allowed ourselves to be swept up in one of our periodic bouts of wishful thinking. I am more concerned about protecting the gains of the last two remarkable years in the market than trying to squeeze a few more drops out of this ageing bull market. Specifically, I’m worried about four things.

The first is what Alan Greenspan identified (admittedly too early, in 1986) as the market’s ‘irrational exuberance’. I witnessed first-hand - and took part in - the breathless excitement of the dot.com bubble in the 1990s. And many of the delusional behaviours on show 25 years ago are in evidence again today. People checking prices through the day, gathering in excited huddles to compare returns. The aching FOMO (fear of missing out) of those who failed to jump on board.

Donald Trump sees the stock market as a barometer of his success. He should be careful what he wishes for. The market is fickle and, as Hoover discovered a century ago, it cares little for the pride of politicians. He might prefer to be measured by something he has control over. I certainly hope he doesn’t see the price of Bitcoin as anything other than a gauge of speculative fervour.

My second concern is the market’s valuation at the beginning of Trump’s second term. The price that people are prepared to pay for a share of companies’ profits is what determines their investment returns over any meaningful timescale. And the price they are prepared to pay today (in America at least) is as punchy as it has almost ever been. The CAPE measure (cyclically adjusted price earnings ratio) devised by Yale professor Robert Shiller, and designed to smooth out the vagaries of the economic cycle, was only more stretched than it is today during the last knockings of that dot.com mania.

For that to be justified, Donald Trump’s proposed agenda of tariffs, tax cuts and deregulation must deliver a paradigm shift in America’s productivity and profitability. The internet didn’t do that, and I don’t expect the new administration’s inflationary programme to do it either.

The last couple of years have enjoyed an unusual combination of rising earnings and higher valuations. That’s a powerful cocktail but not a sustainable one. Usually, the two march to a different beat with valuations anticipating movements in earnings by several months. By the time earnings have started to move, valuations have already done their work. With valuations having risen by a third since the market low in October 2022, they are likely to stand still at best from here and the heavy lifting will have to be done by company results.

Worry number three is the Presidential cycle. This is one of the more predictable aspects of the stock market which delivers much better returns for investors in the two years leading up to a Presidential election than in the two that follow it. On average investors can expect twice as much from the second half of the cycle as from the first. The trajectory of the market in 2023 and 2024 has tracked this template closely. It points to a much shallower path for shares next year.

My final concern is the impact of the bond market. As we saw in 2022, when rising interest rates kicked the stool from under equity investors, the outlook for bond yields cannot be ignored. In two months, the market’s expectation about where US interest rates will be at the start of 2026 has risen by a full percentage point from under 3% to nearly 4%. The so-called term premium, which protects investors from future inflation, has turned positive again. That means bond yields are likely to settle 1-1.5 percentage points above the inflation rate. It seems unlikely that they will dip much below 4% in this cycle. With safe bond returns at that level, there is less incentive for investors to take the risk of buying shares. Cash, too, becomes a viable alternative for nervous savers.

There’s no reason to assume that investors are looking at a re-run of either the 1920s or 1990s. Rising earnings and a strong economy continue to provide a tailwind for shares. The duration and scale of the current bull market are not excessive. Alarm bells are not yet ringing. But it seems entirely reasonable to expect next year to be less rewarding than the last two. For that reason, I’m not chasing the Trump Bump.

This article was originally published in The Telegraph.

Important information: - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.