President Donald Trump’s second-term stock-market rally is facing two competing pressures: tariffs that have lifted consumer-goods prices and an artificial-intelligence investment boom that is adding demand for technology, electricity and other inputs. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite had risen 19%, 30% and 39%, respectively, since the start of Trump’s second term through Oct. 13, after gains of 57%, 70% and 142% during his first term.
The rally has benefited from the AI infrastructure build-out, which was already underway before Trump returned to office, as well as from stronger-than-expected corporate earnings. Trump’s policies have also supported markets: the 2017 Tax Cuts and Jobs Act reduced the top corporate tax rate from 35% to 21%, allowing companies to retain more earnings and contributing to record S&P 500 share repurchases.
Tariffs are now adding to price pressures. The analysis found that each percentage-point increase in average tariffs raises consumer-goods prices by about one-quarter after a year, with roughly two-thirds of the effect coming quickly through higher import prices and the rest emerging more slowly as U.S. Producers face higher costs and less competition from imports.
The tariff effect is not disappearing simply because its contribution to the annual inflation rate is expected to fade.
The Federal Reserve has identified a second source of pressure in the AI boom itself. Federal Reserve officials linked higher core-goods inflation to both tariff pass-through and strong demand connected to AI investment, including demand for data centers, high-tech equipment and software.
At the same time, they said eventual productivity gains from AI could reduce production costs and increase supply, though that effect would take time to emerge.
The policy risk for stocks are that persistent inflation could keep interest rates higher for longer. In June, officials said that stronger AI investment could contribute to inflation that remains elevated and indicated that additional policy tightening could be appropriate if inflation stayed high despite stable employment.
That creates a tension at the center of the rally: AI investment is supporting earnings, capital spending and equity valuations, but the same investment is increasing demand for scarce technology products and electricity. Analysis: if higher prices keep borrowing costs elevated, the financing burden for data-center expansion could rise at the same time that investors become less willing to pay premium valuations for AI-linked growth. The verified evidence establishes that risk as a potential pressure on the rally, not as proof that an AI bubble will burst or that the bull market has ended.