The U.S. stock market has been untouchable lately. Since April, S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) have added 15% and 22%, respectively, despite below-average economic growth in the first quarter and the recent acceleration in inflation.
President Trump is at least partially responsible for both headwinds. His tariffs probably contributed to slower consumer spending in the first quarter, which dragged on economic growth. And his decision to attack Iran has pushed inflation to a multiyear high.
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Will the stock market crash under Trump? History says investors have reason to worry.
Interest rate increases could drag the stock market into a correction
Trump authorized military action in Iran in late February, expecting a quick victory. But the initial strikes turned into a monthslong conflict that closed the Strait of Hormuz, the most critical oil chokepoint in the world. Supply disruptions drove oil prices to a multiyear high, which led to a resurgence in inflation.
This week, Trump reportedly struck a deal with Iran that would end the conflict and reopen the Strait of Hormuz, but oil prices could remain elevated for months because it will take time for supply chains to normalize. Restarting plants will take weeks, and fixing damaged infrastructure will take even longer.
Meanwhile, consumer inflation, as measured by the Consumer Price Index, rose to 4.2% in May, the highest reading since early 2023. And that number could go higher. Wholesale inflation, as measured by the Producer Price Index, rose to 6.5% in May, the highest level since late 2022. Changes in wholesale inflation often foreshadow changes in consumer inflation.
Ultimately, the market thinks rising inflation will force the Federal Reserve to raise its benchmark interest rate. In fact, Yardeni Research expects a rate increase in July, though the consensus says the Fed won’t raise rates until December. Regardless, the pivot to rate increases has historically been damaging for stocks.
Since 1999, the Fed has started four rate-increase cycles; the S&P 500 and Nasdaq Composite have usually fallen over the next three months, with average peak-to-trough declines of 10% and 15%, respectively. In short, history says both indexes could slip into a market correction when the Fed starts raising rates.
