There's a New Threat to the Stock Market and President Donald Trump's Economy

From a statistical standpoint, Wall Street has enjoyed having President Donald Trump in the White House. The average annualized returns for the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) have been considerably higher under Trump than under most other presidents since the late 1890s.

Outsize stock market gains during Trump's non-consecutive second term have primarily been powered by the artificial intelligence (AI) infrastructure build-out.

Unfortunately, a new threat has entered the picture, which has the ability to upend the AI-driven bull market and President Trump's economy. I'm talking about the Federal Reserve's rate-hiking cycle.

Rate hikes can do a number on stocks and Trump's economy. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.

Rate hikes can squash the stock market's leading catalyst

Better-than-expected corporate earnings, fueled by the AI data center build-out, have been the catalyst fueling the Dow's, S&P 500's, and Nasdaq's push to record highs. Demand for graphics processing units (GPUs) and high-bandwidth memory (HBM) is off the charts, leading to supply shortages and exceptional pricing power for the companies behind these products.

From an investment perspective, insatiable demand coupled with persistent supply shortages is a favorable scenario. We've watched the gross margin for GPU kingpin Nvidia (NASDAQ:NVDA) and HBM titan Micron Technology (NASDAQ:MU) go through the roof.

But with Kevin Warsh and the Federal Open Market Committee (FOMC) kicking off a rate-hiking cycle on Sept. 16, Wall Street has been put on notice.

AI firms and the US government are competing for capital:

US Treasury issuance excluding T-bills has risen to $5.06 trillion over the last 12 months, the highest since the 2021 record.

Over the same period, corporate debt issuance has surged to a record $2.64 trillion.

This… pic.twitter.com/X3wosDlxxg

— The Kobeissi Letter (@KobeissiLetter) September 17, 2026

This build-out is being financed, in part, by debt. If businesses respond by slowing down this expansion, even marginally, it could be dire for the stock market.

Let's not forget that the stock market entered 2026 at its second-priciest valuation over nearly 156 years. Stocks are arguably priced for perfection. If rate hikes lead to slower AI growth rates and/or a re-rating of premium stock valuations, it could mark an abrupt end to the AI-driven bull market.

Image source: Getty Images.

Higher lending costs could clobber Trump's economy

But it's not just the stock market that may suffer as the FOMC looks to rein in inflation. While Fed Chair Warsh still views monetary policy as accommodative and highlighted strong productivity growth at the September FOMC meeting, history suggests U.S. M2 money supply could be the culprit that upends the economy.

M2 money supply is comprised of everything in M1 (cash, coins, and demand deposits in checking accounts), plus savings accounts, money market accounts, and certificates of deposit (CDs) under $100,000. It's money people have access to, but may require some effort to get their hands on.

Historically, M2 money supply has moved up and to the right with virtually no retracement. A growing economy requires more capital in circulation to facilitate transactions. But when year-over-year M2 growth slows or, in rarer cases, declines, it's often bad news for the U.S. economy (and stock market).

BREAKING: US M2 money supply surged +$102.8 billion in July, to a record $23.22 trillion.

This marks the 27th consecutive monthly increase.

Since the start of 2026, M2 has now risen +$862.7 billion.

Furthermore, money supply now stands $1.43 trillion above the March 2022 peak.… pic.twitter.com/WmEIozcHiw

— The Kobeissi Letter (@KobeissiLetter) August 28, 2026

During the COVID-19 pandemic, U.S. M2 money supply soared at its fastest pace in history. But when the Fed began its rate-hiking cycle in March 2022, it kicked off the steepest decline in U.S. money supply since the Great Depression.

While the U.S. economy didn't dip into a recession, annualized gross domestic product in the first and second quarters of 2022 was (1%) and 0.6%, respectively. Additionally, the Dow, S&P 500, and Nasdaq all endured bear markets in 2022.

If the Fed's actions curtail or reverse the rapid growth in M2 money supply, it could spell disaster for Donald Trump's economy.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology and Nvidia. The Motley Fool has a disclosure policy.