By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
The panel agrees that the Iran war's oil disruption has driven up inflation, challenging the Fed's rate target and increasing the likelihood of hikes. However, they disagree on the persistence of inflation and the Fed's response, with some arguing for a 'higher-for-longer' rate path and others suggesting a more transitory impact. The panel also highlights the risk of fiscal-monetary feedback loops and the potential for a fiscal crisis if the Fed hikes too aggressively.
Risk: Sustained high inflation leading to higher interest rates, which could increase the cost of capital for AI capex and buybacks, and potentially trigger a multiple contraction across the Nasdaq.
Opportunity: A potential re-rating of equities if energy-driven spikes prove transitory and core inflation drifts back towards 2%, enabling the Fed to pause or cut rates.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Earlier this month, the widely followed Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and tech-stock-dependent Nasdaq Composite (NASDAQINDEX: ^IXIC) all ascended to fresh record highs.
The stock market producing outsize annualized returns under President Donald Trump is nothing new. The Dow, S&P 500, and Nasdaq skyrocketed 57%, 70%, and 142%, respectively, during Trump's first, non-consecutive term. Lately, the artificial intelligence (AI) data center build-out, better-than-expected corporate earnings, and record S&P 500 share buybacks in 2025 have fueled upside for equities.
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But the Trump bull market may not be as healthy as the stock market's leading indexes suggest. Inflation is becoming a serious worry for Wall Street -- even as Trump himself believes investors should be looking beyond rising prices.
If not for tariffs and the Iran war, perhaps the biggest story of Trump's second term has been his public feud with now-former Fed Chair Jerome Powell.
Since Trump's inauguration on Jan. 20, 2025, he's been critical of Powell and the Federal Open Market Committee (FOMC) for not aggressively slashing interest rates. The FOMC -- the 12-person body, including the Fed chair, responsible for setting the nation's monetary policy -- lowered the federal funds target rate on six occasions from September 2024 through December 2025. But the current range of 3.5% to 3.75% remains well above the president's touted target of 1% or below.
While Trump hasn't specifically mentioned why he's lobbied so vocally for lower interest rates, there are several implications. To start with, lower interest rates would incentivize businesses to borrow, thereby fueling the AI data center build-out and boosting hiring. The unemployment rate, while steady in recent months, has trended modestly higher over the last three years.
Rate cuts would also translate into lower Treasury bond yields, which in turn can indirectly drag down mortgage rates and make owning a home more affordable.
BREAKING...🚨🚨🚨
-- Charlie Bilello (@charliebilello) March 18, 2026
The US National Debt just crossed above $39 trillion for the first time, more than doubling over the last 10 years. pic.twitter.com/cFZYVuoJP3
However, making it easier to service U.S. national debt by lowering borrowing costs might be the No. 1 incentive for the president. Federal deficits have topped $1.38 trillion every fiscal year since this decade began, and this trend simply isn't sustainable.
In a recent interview with Kristen Welker on NBC's Meet the Press, Trump was candid in his response to Welker's insinuation that the Fed may be forced to raise interest rates. Said the president:
I think Kevin [Warsh] is – Kevin is fantastic, and I want him to do whatever he wants. I don't want to have a big influence on him. But we had a great [jobs] report. We're doing great, and it's unfair that whenever you do great, they want to raise interest rates. It should be the opposite way... There's no reason to raise interest rates.
Despite claiming to support Federal Reserve independence, these seven words, "there's no reason to raise interest rates," demonstrate that Donald Trump has maintained his hardline stance on monetary policy. The problem is that economic data, coupled with historical precedent, suggest Trump's seven-word take on interest rates is due for a reality check.
In February, trailing 12-month (TTM) inflation was a modest 2.4% and moving toward the Fed's long-established 2% inflation target. In other words, the FOMC maintaining its easing bias following six rate cuts since September 2024 made sense.
However, the Iran war changed everything.
Since President Trump ordered the U.S. military to attack Iran on Feb. 28, the daily flow of approximately 20 million barrels of petroleum liquids, representing 20% of worldwide demand, has been disrupted. The largest energy supply disruption in modern history comes with serious consequences.
Prices at the pump have soared in the wake of this disruption, pinching consumers' pocketbooks. Energy prices are the primary catalyst lifting TTM inflation from 2.4% in February to an estimated 4.18% in May, as of this writing on June 8 (i.e., before the official release of the May inflation report).
But energy supply shocks often have several stages. Though rapid increases in fuel prices typically garner the most headlines, it's the delayed effects of inflation on businesses that can be the most problematic. Once higher transportation and production costs filter into economic data, inflation can rise further and last longer.
US inflation is red hot.
-- The Kobeissi Letter (@KobeissiLetter) May 28, 2026
CPI Inflation: 3.8%, highest since May 2023
PCE Inflation: 3.8%, highest since May 2023
PPI Inflation: 6%, highest since March 2023
Services Inflation: 3.4%, highest since Sept 2025
Shelter Inflation: 3.3%, highest since Sept 2025
6.... pic.twitter.com/u8kaSN54G3
Despite the president's claim that "there's no reason to raise interest rates," the inflationary measure that FOMC members have historically favored, Core Personal Consumption Expenditures (PCE), is edging higher. Even though the June inflation forecast from the Cleveland Fed calls for a modest downtick in TTM inflation, Core PCE is expected to inch higher. This signifies that the inflationary effects of the Iran war are spilling over into non-energy sectors and industries. In short, there are clearly defined economic data points that support the potential for FOMC rate hikes.
Additionally, there are ample clues within the FOMC to suggest interest rate hikes, not cuts, are on the horizon. Aside from Trump's handpicked successor to Powell, Kevin Warsh, exhibiting hawkish voting tendencies as a former FOMC member (Feb. 24, 2006 – March 31, 2011), the April Fed meeting minutes note that a majority of members favored removing the easing bias statement. Shelving this statement and shifting to a neutral bias as early as the June 17 FOMC meeting would be the first step toward raising interest rates.
Even futures markets are betting against President Trump's take on interest rates. The CME Group's FedWatch Tool predicts a growing probability of rate hikes by late 2026/early 2027. There's a 71.3% probability of at least one rate hike taking place by the FOMC's December 2026 meeting, based on data from June 8.
While Wall Street would prefer the president to be correct, economic data and historical precedent point to rate hikes, not cuts, in the foreseeable future. A much-needed reality check for Trump on interest rates is undeniably worrisome for a historically pricey stock market that requires low lending rates to fuel the AI infrastructure build-out.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"Energy-driven core inflation spillover makes FOMC rate hikes likely by late 2026, pressuring equities that require sustained low rates."
The article rightly highlights how the Iran war's oil disruption has shifted inflation from 2.4% TTM in February toward 4.18% by May, with core PCE and services components now rising. This undercuts Trump's 1% rate target and raises the probability of hikes to 71% by December 2026 per FedWatch. High-valuation equities dependent on AI capex and buybacks face pressure if borrowing costs climb. The $39T debt adds incentive for lower rates but won't override FOMC data dependence. Warsh's hawkish history and April minutes removing the easing bias further tilt policy toward tightening.
The supply shock could prove short-lived if diplomatic channels reopen flows quickly, and the Cleveland Fed's June forecast already shows a modest inflation downtick that might keep the FOMC on hold rather than hiking.
"Inflation should moderate toward the 2% target over the next 12–18 months, allowing the Fed to pause or cut and letting equities re-rate on lower real yields."
Even as the article frames Trump as pushing for rate cuts and the market pricing in hawkish shifts, the real story is more nuanced: AI capex and buybacks have kept earnings resilient, while core inflation may have already peaked and drift toward 2% if energy prices normalize. The piece glosses over the risk that energy-driven spikes could prove transitory and that the Fed’s reaction function is driven by core PCE, not headlines. A sharper slowdown in growth or mounting debt-service costs could force the Fed to pause or cut, potentially enabling a re-rating of equities despite today’s elevated valuation.
The strongest counter is that energy prices could stay elevated or re-ignite, core inflation remains stubborn, and the Fed stays hawkish, which would blunt any re-rating and press equity multiples lower as yields rise.
"The transition from an easing bias to a potential rate-hike cycle will force a valuation reset for growth-heavy indices that are currently priced for perfection."
The market is currently pricing in a 'soft landing' that ignores the stagflationary shock of the Iran energy disruption. With CPI at 4.18% and rising, the Fed is trapped between political pressure for rate cuts and the necessity of defending the dollar's purchasing power. While the AI infrastructure build-out provides a structural floor for tech earnings, the valuation multiples—specifically the S&P 500 trading at elevated forward P/E ratios—are predicated on a low-rate environment that is rapidly evaporating. If the FOMC shifts to a hawkish bias in June, the cost of capital for capital-intensive data center expansion will spike, likely triggering a multiple contraction across the Nasdaq.
The AI productivity boom could create enough disinflationary pressure through labor efficiency to offset energy-driven supply shocks, potentially allowing the Fed to pause rather than hike.
"Rate hikes are probable if Core PCE stays elevated post-energy shock, but the real vulnerability isn't rates—it's whether AI-driven earnings growth can justify current valuations if lending costs rise."
The article conflates two separate problems: inflation from a geopolitical shock (Iran disruption) versus structural rate policy. Yes, Core PCE is rising and futures show 71% odds of hikes by December 2026—that's real. But the article glosses over a critical detail: energy shocks are typically *transitory*. Oil at $80/bbl in 2026 is manageable; the real risk is if Core PCE stays elevated *after* energy normalizes. The 39 trillion debt overhang is the article's strongest point—lower rates do ease debt service—but that's a fiscal problem masquerading as monetary policy. The S&P 500's 70% gain under Trump is built on AI capex and buybacks, not rate cuts. Rate hikes could still happen without derailing equities if earnings growth justifies valuations.
If the Iran disruption resolves within 6 months and energy prices collapse, inflation reverts to 2.4%, and the Fed never hikes—Trump looks prescient, and the market keeps running. The article assumes geopolitical risk persists; it may not.
"Sticky core components after energy normalization could still force hikes and compress multiples."
Claude overlooks how the article's rising services and core PCE components could persist even after any oil normalization, as wage pressures from the initial 4.18% CPI print lock in. This directly challenges his transitory framing and ChatGPT's re-rating case: sustained 71% hike odds would lift the cost of capital for AI capex and buybacks alike, regardless of debt-service incentives for cuts.
"Even if Iran flows normalize, core services inflation and wage pressures keep the Fed higher-for-longer, compressing AI-capex multiples despite debt-service incentives."
Grok overlooks the persistence risk in core services inflation. Even if Iran flows normalize, services' wage-driven components may stay elevated, keeping the Fed on a higher-for-longer path. That implies not just a fleeting supply shock, but a regime where higher rates compress multiples for AI-capex names even with debt-financing incentives. The focus on energy normalization is too narrow; the bigger risk is rate normalization staying hotter than investors assume, still pressuring equities.
"Rising debt service costs will force the Fed to prioritize fiscal sustainability over inflation targets, ultimately supporting equity valuations through liquidity injections."
Gemini and Grok are ignoring the fiscal-monetary feedback loop. If the Fed hikes to 5.5%+ to fight core inflation, the Treasury’s interest expense on $39T of debt will likely exceed $1.5T annually, forcing a fiscal crisis. The Fed will be forced to choose between currency debasement or a recessionary pivot. Equities aren't just pricing in AI growth; they are pricing in the inevitable 'fiscal dominance' where the Fed eventually yields to the Treasury, keeping real rates negative despite headline hawkishness.
"Fiscal dominance is plausible only if core inflation remains sticky; transitory energy shocks don't force that choice."
Gemini's fiscal dominance argument assumes the Fed capitulates—but that's not inevitable. The 2022-23 cycle proved the FOMC can tolerate Treasury pain to fight inflation. The real question: does core PCE stay above 3% after energy normalizes? If it drops to 2.5-2.8%, the Fed has room to pause without choosing between currency debasement and recession. The article doesn't establish that persistence convincingly.
The panel agrees that the Iran war's oil disruption has driven up inflation, challenging the Fed's rate target and increasing the likelihood of hikes. However, they disagree on the persistence of inflation and the Fed's response, with some arguing for a 'higher-for-longer' rate path and others suggesting a more transitory impact. The panel also highlights the risk of fiscal-monetary feedback loops and the potential for a fiscal crisis if the Fed hikes too aggressively.
A potential re-rating of equities if energy-driven spikes prove transitory and core inflation drifts back towards 2%, enabling the Fed to pause or cut rates.
Sustained high inflation leading to higher interest rates, which could increase the cost of capital for AI capex and buybacks, and potentially trigger a multiple contraction across the Nasdaq.