Sean Williams, The Motley Fool Sun, October 18, 2026 at 4:26 AM EDT 7 min read ^DJI -0.34% ^IXIC -2.14% NVDA -1.43% Trade NVIDIA on Coinbase Trading disclosure Trading disclosure The above button links to Coinbase. Yahoo Finance is not a broker-dealer or investment adviser and does not offer securities or cryptocurrencies for sale or facilitate trading. Coinbase pays us for certain activity generated through this link. Prices displayed are informational.
President Donald Trump has overseen two of the most volatile periods in the stock market's storied history: the five-week COVID-19 crash in February-March 2020 and the week-long tariff tantrum in early April 2025.
At the same time, the stock market has thrived under President Trump. The iconic Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and innovation-fueled Nasdaq Composite (NASDAQINDEX:^IXIC) gained 57%, 70%, and 142% during his first non-consecutive term, respectively, and have added 19%, 30%, and 39% since the start of his second term (through Oct. 13).
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The Trump bull market has flourished due to a number of factors, not all of which bear President Trump's fingerprints. For instance, the artificial intelligence (AI) infrastructure build-out was well underway before Trump's second term began. The AI revolution has led to significantly better-than-expected corporate earnings growth.
President Donald Trump's bull market may be on shaky ground. Image source: Official White House Photo.
But the president's policies have also played a role. The passage of the Tax Cuts and Jobs Act in December 2017 permanently lowered the peak marginal corporate income tax rate from 35% to 21%. This is the lowest level since 1939, enabling businesses to retain more of their income, resulting in record S&P 500 share buybacks.
However, the Trump bull market may not be as unstoppable as the Dow, S&P 500, and Nasdaq Composite make it appear. Two catalysts, one of which is Trumpflation (inflation driven by President Trump's policies), threaten to knock Wall Street's bull market off its lofty pedestal.
At any given moment, the stock market has a laundry list of possible downside catalysts. This includes historically pricey valuations, rapidly rising outstanding margin debt, and even the potential for an AI bubble-bursting event. But the one catalyst that can no longer be ignored is persistently elevated inflation.
When the U.S. economy is growing, consumer prices are expected to rise modestly. Businesses should have some degree of pricing power over their goods and services, which is why the Federal Reserve targets a long-term inflation rate of 2% and not 0%.
But because of Trumpflation, the annualized inflation rate reached a three-year high of 4.2% in May -- more than double the Fed's long-term target.
To begin with, President Trump's tariff and trade policy is lifting consumer prices.
On paper, tariffs are designed to protect American jobs, encourage companies to produce domestically, and make American goods more price-competitive with those imported from overseas markets. However, the practical application of adding duties to unfinished goods hasn't worked out as planned. Assigning tariffs to select imports risks increasing domestic production costs, which are then passed on to consumers.
A newly published analysis by three New York Fed economists writing for Liberty Street Economics ("How Fast Do Tariffs Pass Through into Consumer Prices") estimates that tariffs contributed 2.9 percentage points to consumer goods prices by February 2026.
The Trump-led Iran war has had an even more visible impact on consumer prices. Shortly after military operations commenced against Iran on Feb. 28, the latter closed the Strait of Hormuz to virtually all maritime traffic. This halted the daily flow of approximately one-fifth of the world's crude oil supply, causing fuel prices to skyrocket.
The effects of Iran-war-driven inflation are also beginning to show up outside the energy sector. The price stickiness of Core Personal Consumption Expenditures suggests that businesses are passing higher costs on to consumers.
The more entrenched Trumpflation becomes, the more likely it is that Fed Chair Kevin Warsh and his colleagues will have to aggressively raise interest rates to tame persistently elevated inflation.
While Trumpflation is playing a key role in kick-starting only the fourth Fed rate-hiking cycle of the 21st century, it's not the only catalyst pushing consumer prices higher. You might be surprised to learn that the stock market's No. 1 catalyst, the AI infrastructure build-out, has its downsides.
More than 30 years ago, the advent and proliferation of the internet lit a fire under Wall Street, sending the Dow Jones Industrial Average, S&P 500, and especially the Nasdaq Composite to new heights. The internet opened new sales and marketing channels and was widely considered the largest technological leap forward.
The AI revolution is the next game-changing innovation with multitrillion-dollar potential. Empowering software and systems with the tools to make autonomous, split-second decisions is an estimated $15.7 trillion global addressable opportunity by 2030, according to PwC analysts.
Demand for AI infrastructure has been nothing short of insatiable, with graphics processing units (GPUs), high-bandwidth memory (HBM), rack servers, and storage solutions flying off the proverbial shelf. The companies behind these products are enjoying record sales and skyrocketing margins.
But the AI infrastructure build-out is something of a double-edged sword for the U.S. economy and the Trump bull market. While strong demand and persistent supply shortages of GPUs and HBM have afforded companies otherworldly pricing power, the higher prices for chips, memory, and storage solutions have worked their way down the chain to consumers. Everything from laptops to smartphones is now pricier because of the AI infrastructure build-out.
Even Fed Chair Warsh and his Federal Open Market Committee colleagues have noted that demand for AI infrastructure is contributing to inflationary pressures.
Similar to Trumpflation, there's no easy way to "fix" AI-driven inflation. As long as demand for AI hardware continues to significantly outstrip supply, consumer prices should remain elevated.
In other words, the more momentum in the sails of the AI revolution, the more likely it is that the Federal Reserve will hike rates to temper inflation. The costlier it becomes for businesses to borrow and expand their data center infrastructure, the higher the odds of an AI bubble-bursting event and the end of the Trump bull market.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Trumpflation and a Surprise Catalyst Are the 2 Biggest Threats to the Trump Bull Market was originally published by The Motley Fool
