Federal Reserve Rate Hikes Would Likely Put the Trump Bull Market on Thin Ice

Despite periods of outsize volatility, the stock market has a rich history of outperforming with President Donald Trump in the White House. Following respective gains of 57%, 70%, and 142% during Trump's first, non-consecutive term, the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) have gained 21%, 28%, and 34% since his second term began.

But a strong argument can be made that Wall Street's major stock indexes aren't accurately reflecting the danger that lurks beneath the surface. Persistently elevated inflation, caused in part by Trumpflation (inflation driven by Trump's policies), has significantly heightened the odds of a Federal Reserve rate hike on Sept. 16.

If the Federal Reserve acts, it could be the Trump bull market that pays the price.

Higher interest rates may doom the Trump bull market. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.

Trumpflation and the AI revolution are projected to force the central bank into action

When the U.S. economy is expanding, economists expect businesses to possess modest pricing power over their goods and services, leading to moderate inflation (rising prices). In May, the trailing 12-month U.S. inflation rate reached a three-year high of 4.2%.

President Trump's policies have been the biggest driver of inflation in 2026. The president's tariff policy -- the Trump administration imposed sweeping global tariffs on more than 80 countries in late July -- is adding duties to unfinished imported goods (e.g., steel), which can increase domestic production costs and consumer prices.

The Trump-led Iran war is also pushing up prices on two fronts. In addition to soaring energy prices stemming from Iran's closure of the Strait of Hormuz, core inflation data suggest that Iran-war-driven inflation has reached the broader economy. In other words, Trumpflation isn't limited to the energy sector.

Almost all of the Fed watchers that had not been expecting a September hike before today changed their call after the August CPI printed a bit firmer than expected https://t.co/NkHgu4nHmF pic.twitter.com/aEBqUIeQm0

— Nick Timiraos (@NickTimiraos) September 11, 2026

Furthermore, the Federal Open Market Committee (FOMC) has cited artificial intelligence (AI) as a source of higher prices. While the overwhelming demand for AI infrastructure is boosting corporate America and the stock market, the supply-demand mismatch, coupled with otherworldly pricing power for AI hardware companies, is sending prices to the moon.

According to aggregated estimates from financial institutions and economists, courtesy of The Wall Street Journal, many expect a significant rate hike on Sept. 16.

Image source: Getty Images.

Interest rate hikes may spell the end of the Trump bull market

Historically, rate-hiking cycles have actually worked out well for Wall Street. Despite the belief that higher lending costs will slow corporate growth, nearly all rate-hiking cycles occur during periods of strong economic growth.

But it's quite possible this time will be different because of the AI revolution.

The AI data center build-out is the undisputed top catalyst for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. The jaw-dropping capital spent on this build-out is being financed, in part, by debt. If prognostications are correct and the FOMC raises borrowing costs on Sept. 16, it can slow this infrastructure expansion.

Stock Market Shiller PE Ratio on the verge of taking out its Dot Com Bubble all-time high 🚨 🤯 👀 pic.twitter.com/CtCmSgWnLt

— Barchart (@Barchart) July 11, 2026

Normally, this wouldn't be a big deal. However, the stock market is currently at its second-priciest valuation in history, fueled by pie-in-the-sky AI growth expectations. If growth forecasts come down, even marginally, due to higher lending rates, it'll almost certainly force Wall Street and investors to rethink the stratospheric valuations they've assigned to AI stocks.

Wall Street is standing on a precipice, and the Sept. 16 FOMC meeting is the catalyst that could get the proverbial ball rolling downhill at high speed.

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.