From a purely statistically standpoint, outsize stock market gains have gone hand-in-hand with Donald Trump’s presidency. Despite historic volatility during the early stages of the COVID-19 pandemic and, more recently, the tariff tantrum in April 2025, the Dow Jones Industrial Average (^DJI +0.46%), S&P 500 (^GSPC +0.05%), and Nasdaq Composite (^IXIC -0.64%) have generated double-digit annualized returns with Trump in the White House.
But history also makes it clear that bull markets aren’t indefinite. While several catalysts threaten to weigh down the stock market, including otherworldly valuations and a parabolic move in outstanding margin debt, inflation is arguably the toughest to sweep under the rug.
President Trump’s policies are fueling inflation — but they aren’t the only issue. Image source: Official White House Photo by Molly Riley.
Although the headline U.S. inflation rate has backed off from a three-year high, Wall Street isn’t out of the woods. An inflation double whammy awaits equity markets in the second half of 2026, significantly increasing the likelihood of a stock market crash under President Trump.
Trumpflation has entered a new stage
As recently as February, trailing 12-month (TTM) inflation was a modest 2.4% and moving closer to the Federal Reserve’s long-term target of 2%. Though Trump’s tariffs were modestly lifting prices in the goods sector in February (something now-former Fed Chair Jerome Powell regularly alluded to in Federal Open Market Committee (FOMC) statements), things appeared to be moving in the right direction.
The Iran war changed everything. The president’s decision to attack Iran prompted the latter to shut down the Strait of Hormuz to most maritime traffic. This effectively halted the flow of a fifth of the world’s petroleum liquid demand and sent gas prices soaring at the fastest pace in over three decades.
Between February and May, TTM inflation jumped from 2.4% to a three-year high of 4.2%, driven almost entirely by a rapid rise in energy commodities.
The good news for consumers is that crude oil prices fell significantly in June, resulting in some relief at the fuel pump. But even though headline inflation fell to 3.5% in June, Trumpflation (i.e., inflation driven by Trump’s policies) is far from over.
BREAKING: June CPI inflation falls to 3.5%, below expectations of 3.8%
Core CPI inflation falls to 2.6%, below expectations of 2.8%.
Month-over-month CPI inflation fell -0.4%, the biggest monthly drop since May 2020.
US stock market futures are surging on the news.
— The Kobeissi Letter (@KobeissiLetter) July 14, 2026
Despite lower energy prices driving down inflation last month, Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, has hardly budged. The Cleveland Fed’s Inflation Nowcasting tool estimates that Core PCE will pare modestly to 3.33% in June from 3.4% in May, before slightly reaccelerating to 3.36% in July.
The stickiness of Core PCE suggests that Trumpflation has entered a new stage, with inflationary pressures spilling beyond the energy sector and becoming broad-based.
For example, businesses are paying more to reroute shipments that would normally travel through the Strait of Hormuz. The cost of petroleum-based products, such as plastics and synthetic polymers, has also risen, while the supply of fertilizer has become scarcer. All of these combined effects, plus several others not mentioned, are pushing up prices domestically.
The next stage of Trumpflation can lead to higher prices sticking around far longer than initially anticipated, which may force the Fed into action. Raising interest rates to stabilize prices can slow the artificial intelligence (AI) data center build-out and require investors to rethink the stratospheric valuations assigned to AI stocks and the broader market.
Image source: Getty Images.
The stock market’s top catalyst is fanning the flames of inflation
If the evolution of Trumpflation is all the FOMC has to contend with, it would be challenging enough. But Wall Street is facing a second source of inflation that may prove virtually impossible to combat: the AI revolution.
Fed Chair Kevin Warsh has been adamant that the FOMC — the 12-person body responsible for setting the country’s monetary policy — will stabilize prices. This was noted by Warsh when speaking with reporters after the June 16-17 FOMC meeting, as well as in his more recent comments at the ECB Forum on Central Banking.
However, the Fed meeting minutes offered the first confirmation that policymakers view AI as inflationary. Contained within the meeting minutes was the following statement:
Both total and core inflation were higher than their levels a year earlier, a development that the staff attributed to a variety of factors, including the pass-through of past tariff increases, higher energy and input costs stemming from the conflict in the Middle East, and the surge in demand related to the AI build-out.
If you’ve invested in companies that are critical to the AI data center build-out, such as graphics processing unit (GPU) titan Nvidia and high-bandwidth memory giant Micron Technology, you’re likely all smiles. Most AI infrastructure stocks have soared as spending on data centers has gone parabolic.
Fed now officially blaming AI for rise in core inflation:
“Core goods price inflation had risen relative to a year earlier, which the staff judged as largely reflecting the effects of tariffs and AI-related price pressures”
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“Some participants remarked that productivity… https://t.co/ne8TnjRV8s— zerohedge (@zerohedge) July 8, 2026
But this tailwind is also a massive headwind for Wall Street. With demand overwhelming supply, companies like Nvidia and Micron are enjoying otherworldly pricing power for their hardware. These higher price points move down the chain, eventually impacting consumers.
While some FOMC members, including Fed Chair Warsh, believe AI will improve economic output and lower long-term inflation, we’re a long way from a resolution of these supply chain issues and from businesses optimizing AI solutions.
As AI hype picks up steam, so can the U.S. inflation rate. If the FOMC chooses to raise interest rates to tackle persistent inflation head-on, it’ll indirectly be going toe-to-toe with the stock market’s hottest catalyst since the advent of the internet. Anything that could stymie the artificial intelligence data center build-out drastically increases the likelihood of a stock market crash under President Donald Trump.
