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From a statistical standpoint, investors have thrived with President Donald Trump in the White House. During his first nonconsecutive term (Jan. 20, 2017 – Jan. 20, 2021), the timeless Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and growth-propelled Nasdaq Composite (NASDAQINDEX:^IXIC) soared 57%, 70%, and 142%, respectively.
Trump's second term has thus far delivered something of an encore performance. The evolution of artificial intelligence (AI), record S&P 500 share buybacks, and better-than-expected corporate earnings, driven by the AI data center build-out and the strength of the U.S. economy, have been Wall Street's fuel.
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President Trump's economy and Wall Street's thriving stock market may both be on thin ice. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.
But things may not be as perfect as they appear for President Trump's economy and the AI-driven bull market that's flourished during his tenure. New inflation data yields terrible news for the economy and the stock market.
Before going any further, let's address an important point: modest inflation (rising prices) is perfectly normal in an expanding economy. Businesses should possess modest pricing power over their goods and services. The issue is when external factors lift the annualized inflation rate above "modest" levels.
Although no inflation forecasting tool is perfect or can concretely guarantee what's to come, the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool has an impressive track record of foreshadowing the future. The Cleveland Fed's proprietary tool accounts for newly released economic data and correspondingly adjusts its inflation forecasts for the current and/or upcoming month.
Specifically, two data points in the latest Inflation Nowcasting update are troublesome for the U.S. economy and Wall Street.
To begin with, the Personal Consumption Expenditures (PCE) Price Index -- the Fed's preferred inflation gauge -- is headed in the wrong direction. After rising from a reported 3.4% in August to 3.6% in September, the Cleveland Fed's inflation tool expects PCE to ascend to 3.77% in October and 3.82% in November. For context, Fed Chair Kevin Warsh has been adamant that the central bank will get the annualized PCE back to 2%.
Arguably even more worrisome is the projected rise in Core PCE, which excludes volatile food and energy costs. Following a slight increase in Core PCE from 3% in August to a reported 3.1% in September, the Cleveland Fed's tool now expects it to reach 3.2% in October and 3.31% in November.
The takeaways are simple but extremely worrisome for Trump's economy and Wall Street's bull market: Trumpflation is worsening, and AI-driven inflation is hitting home.
One of the prime catalysts for this persistently elevated inflation is Trumpflation (i.e., inflation directly traced to President Trump's policies). In particular, two of the president's policies -- tariffs and the Iran war -- are responsible for boosting consumer prices.
Trump's tariff and trade policy has been lifting prices for more than a year. A recently published report ("How Fast Do Tariffs Pass Through into Consumer Prices?") by three New York Federal Reserve economists writing for Liberty Street Economics showed that the president's 2025 tariffs increased goods price inflation by an estimated 2.9 percentage points by February 2026.
In addition to tariffs raising the prices of imported goods, the authors note that unfinished goods, such as steel, could also increase domestic manufacturing costs. Furthermore, in instances when imported products were notably costlier, U.S. manufacturers would occasionally raise their own prices to capture some of this difference.
Meanwhile, the closure of the Strait of Hormuz, tied to the Iran war, created the largest energy supply disruption in modern history. Gas and diesel prices have skyrocketed, with the latter reaching an all-time high in September.
But it's important to note that the Iran war isn't just an energy supply problem any longer. The added costs of rerouting shipments, changing suppliers, and paying more for petroleum-based goods (e.g., plastics), among other factors, have reached the broader economy. In short, Trumpflation has become entrenched.
Whereas energy supply shocks are often short-lived, based on what history tells us, Trumpflation is positioned as a longer-term inflationary force. More than likely, Fed Chair Kevin Warsh and the Federal Open Market Committee (FOMC) will need to be more aggressive with interest rate hikes to lower the PCE Price Index and Core PCE in a timely manner.
But it's not just Trumpflation that has Donald Trump's economy and the stock market on edge. Wall Street's leading catalyst, the AI infrastructure build-out, also threatens to sink the proverbial ship.
On the one hand, the AI revolution has been the hottest trend on Wall Street since the advent and proliferation of the internet in the mid-1990s. This is a $22.5 trillion addressable opportunity through 2031, according to IDC, and the amount of capital being spent on the AI infrastructure build-out speaks to the game-changing nature of this technology.
However, the AI infrastructure build-out also comes with a steep cost to businesses and consumers.
The insatiable demand for AI hardware, coupled with ongoing supply shortages of graphics processing units and memory solutions, has driven up prices for these goods and other electronic products throughout the supply chain. Consumers buying laptops, smartphones, or anything with a central processing unit, storage, or memory are almost certainly paying more for that device.
According to data from the U.S. Bureau of Labor Statistics and the St. Louis Federal Reserve, the Import Price Index for Computer and Electronic Products catapulted to its highest level since December 2013, as of September 2026. In other words, the stock market's No. 1 catalyst is quite inflationary.
The inflationary effects of AI put the central bank in a quandary. If policymakers do nothing, the AI data center build-out will likely push consumer prices even higher. But if Fed Chair Warsh and the FOMC tackle persistently elevated inflation head-on, they could devastate a historically pricey stock market and a key economic growth driver.
If borrowing costs climb and the AI build-out slows, even slightly, it may be enough to tip the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite over the edge.
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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.
New Inflation Data Offers Terrible News for President Donald Trump's Economy and the AI-Driven Bull Market was originally published by The Motley Fool
