Despite a wild ride in March, the first half of 2026 is shaping up as another stellar year for Wall Street. Through the closing bell on June 29, the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) have risen by 9%, 9%, and 11% year-to-date, respectively.
Outsize stock market returns under President Donald Trump are nothing new. The Dow, S&P 500, and Nasdaq Composite returned 57%, 70%, and 142%, respectively, during his first non-consecutive term. Investors have embraced Trump’s permanent lowering of the peak marginal corporate income tax rate and the subsequent increase in share buybacks by S&P 500 companies.
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But the stock market’s historic rally may be far shakier than Wall Street’s major indexes imply. Although recent record highs for the Dow, S&P 500, and Nasdaq suggest Wall Street is looking past the Trump-driven surge in inflation (i.e., “Trumpflation”), an unpleasant surprise awaits the president and investors.
Trumpflation has been impossible to miss
Before going any further, it’s important to note that a modest level of inflation is perfectly normal and healthy. The Federal Open Market Committee (FOMC) — the 12-person body responsible for setting the nation’s monetary policy — has maintained a long-term inflation target of 2% since January 2012. Businesses should have some degree of pricing power in an expanding economy.
But what we’ve witnessed on the inflationary front in recent months isn’t healthy or welcome.
In February, the U.S. Bureau of Labor Statistics reported trailing 12-month (TTM) inflation of just 2.4%. Though this figure was modestly impacted by the price stickiness of Donald Trump’s tariffs in the goods sector, all signs pointed to inflation heading toward the Fed’s long-term target.
Then the Iran war happened. President Trump’s decision to attack Iran on Feb. 28 led the latter to close the Strait of Hormuz to essentially all commercial vessels. This move halted the daily flow of roughly 20 million barrels of petroleum liquids and represented the largest modern-day disruption of the energy supply chain.
The subsequent reaction in energy markets was impossible to miss. Crude oil prices soared by close to 70% in a matter of weeks, while gas prices increased at the fastest pace in more than three decades. This rapid climb in energy commodities almost singlehandedly sent TTM inflation soaring. Between February and May, inflation jumped from 2.4% to a three-year high of 4.2%.
