U.S. stocks have been on a blistering run since early June, with the Dow, S&P 500 and Nasdaq repeatedly notching new highs. But that stellar performance may be masking an uncomfortable reality: inflation driven directly by President Donald Trump’s policies is no longer just an energy shock. It is broadening in ways that spell serious trouble for the Federal Reserve and for an equity market trading at historically stretched valuations.
The initial inflation surge was overwhelmingly a supply-side story. After President Trump greenlit military operations against Iran, the country effectively shut down the Strait of Hormuz, choking off roughly a fifth of the world’s petroleum liquids. Fuel prices rocketed at the fastest pace in decades, catapulting trailing 12-month U.S. inflation from 2.4% in February to a three-year high of 4.2% in May.
Recent data, however, show the problem has metastasized. Headline inflation retreated to 3.5% in June, yet core Personal Consumption Expenditures—the Fed’s preferred gauge—barely budged, edging down to just 3.3% from 3.4% in May. The Cleveland Fed’s Inflation Nowcasting model now estimates a nudge back to 3.4% in August. Beneath that sticky core number sits an even more worrying trend: price pressures are becoming embedded across the economy. According to Carson Group’s Chief Macro Strategist Sonu Varghese and Chief Market Strategist Ryan Detrick, 52% of the 178 components that make up core PCE recorded year-over-year inflation above 3% in June. By comparison, only 41% of those components were accelerating at that pace back in April 2025, when President Trump unveiled his “Liberation Day” tariffs.
That broadening is forcing an uncomfortable conversation inside the Federal Reserve. At the July policy meeting, the Federal Open Market Committee voted 9-to-3 to hold rates steady, but the dissent was historic: three regional bank presidents explicitly pushed for a quarter-point rate increase. It marked the first time since 2016 that the FOMC has recorded three dissenting votes in the same direction. The driving force behind that rebellion is a growing conviction that inflation, once it becomes entrenched, is far harder to crush than a temporary energy spike. Fed Chair Kevin Warsh and his colleagues now face the very real prospect of having to hike again.
For the stock market, that is a deeply consequential pivot. Higher interest rates alone are not necessarily a death sentence for equities, but the backdrop makes any tightening especially treacherous. A monumental build-out of artificial intelligence data centers has been partially financed with debt. Should borrowing costs rise, even a marginal slowdown in AI infrastructure spending could force investors to slash growth assumptions and deflate the historically high valuation premiums enjoyed by the mega-cap companies leading the market rally. The days of outsized returns for the Dow, S&P 500 and Nasdaq might abruptly end.
Jamie Dimon, CEO of JPMorgan Chase, has flagged another channel through which AI could keep rates higher for longer. “Inflation is both what people expect, but it’s also capital demand, and it seems to me there’s a lot of demand for capital,” Dimon told CNBC. With technology firms pouring billions of dollars into AI data centers, that insatiable appetite for capital adds upward pressure on rates and threatens to keep inflation from falling back to the Fed’s 2% target. If inflation refuses to cooperate, the case for additional tightening—or at least a prolonged hold at elevated levels—only strengthens.
For more than two years, markets have priced in a trajectory of eventual rate cuts. While interest rates have come down from their 2022 peaks, they remain far from pre-tightening levels. Should expectations flip and rate hikes return to the conversation, the boost that investors had been counting on would evaporate, triggering caution and a potential pullback in stocks. The S&P 500, poised for what could be a fourth consecutive year of above-average returns, could be headed for a significant decline.
Trumpflation has evolved from a narrow energy supply crisis into a widespread price phenomenon, forcing the Fed toward a stance far more hawkish than markets have anticipated. With rates likely to stay high or move even higher, and with equities still riding an extended run of outsized gains, the moment to tilt toward defensive stocks and value-oriented assets in search of a margin of safety is now.
