War, inflation and Trump’s tariffs have shaken the US. Why does the stock market keep going up? | Stock markets
March 27 was a dark Friday for Wall Street. Oil prices were climbing and the war with Iran was raging. The markets reacted accordingly; The Dow and Nasdaq have entered correction territory, falling more than 10% below their peaks after a month-long sell-off.
Fast forward seven weeks later to May 13, and the situation in Iran looked marginally better. Oil prices were high and the Strait of Hormuz was still closed. Peace talks with Iran appeared weak despite pressure from high gas prices. Donald Trump said Wednesday that Americans’ finances are not “one bit” motivating to end the war.
But still, stock markets have not only recovered from their losses but are also thriving.
Even before the start of the war, the US stock market had proven incredibly resilient to political and economic instability. The market shrugged off the Covid-19 recession and generationally high inflation, absorbed Russia’s invasion of Ukraine and increasingly ignored Trump’s tariff debates. Americans continue to struggle with an affordability crisis every day and consumer confidence is collapsing, but markets continue to rise.
Yes, Wall Street still has bad days. However, the technology-heavy Nasdaq index continued to rise as investments in artificial intelligence continued. The index has increased by 11% since the beginning of the year; That’s nearly half the gains it saw last year. The Dow and S&P 500 continue to approach record highs.
As investors recover from the latest shock and reach new highs, questions arise: What is driving this phenomenon and how long can this bull market last?
Protector graphic. Source: S&P and Dow Jones Indices via Yahoo Finance
Tacos every day day
Some economists point to a mindset investors are adopting: President Trump will back away from his most extreme policies, like Always Chicken Out or Tacos.
Rolling back threats has been a hallmark of Trump 2.0, especially when it comes to tariffs and Iran. When Trump announced his “redemption day” tariffs, he delayed their implementation hours after they were announced. Similarly, he threatened 25% tariffs on eight EU countries when angry at the annexation of Greenland. Those tariffs were also canceled.
Now, even though Trump says that the ceasefire in Iran is on “life support”, the markets continue to rise.
But as Eswar Prasad, a former IMF official and economist at Cornell, points out, investor confidence amid the crisis predates Trump and Taco.
“Investors are now in a situation where there is a serious problem in the financial system. [US Federal Reserve] “The US government will step in and will not allow the events to escalate further,” Prasad said.
But Prasad said federal intervention in a crisis — such as the collapse of regional banks like Silicon Valley Bank whose depositors were bailed out by the government — could mask risks, especially at a time when supervision and regulation of financial markets has weakened.
“This is a concern we’re already seeing about how ineffective oversight is causing problems with Silicon Valley Bank and First Republic in 2023,” Prasad said. “The question is: Where is risk hiding now?”
K-shaped economy
Even though inflation has fallen since hitting a 40-year high in 2022, Americans are still feeling the pain of rising prices. In the midst of the war against Iran, inflation began to rise again. Annual inflation in April It increased from 2.4% in February to 3.8%.
Higher prices generally mean less spending among all Americans. But instead, richer Americans continue to spend while lower-income Americans struggle to manage their budgets.
The latest evidence of this comes from the New York Federal Reserve, which shows that low-income Americans to cut High-income Americans did not change their gas consumption at all compared to their use of gas during the Iran war.
Economists have begun calling this phenomenon the “K-shaped” economy to represent the bifurcated experience of Americans whose wealth is tied to the stock market and who have therefore done really well over the past few years, and those who have not.
The vast majority of the stock market is owned by a small portion of Americans: The top 10 percent of income earners in the U.S. own 87.2 percent of the market. The bottom 50 percent own only 1.1 percent of all shares.
Continued spending from the top as other consumers cut back on spending has kept many companies afloat.
“Our top ‘K’ consumers continue to invest in travel, it’s their priority, and they want to have that experience,” said Ed Bastian, CEO of Delta Air Lines. CNBC When the company announced its quarterly earnings last month, it said revenue from Delta’s premium offerings had doubled from last year.
While a rising stock market may keep a handful of Americans happy and spending, recent polls show that the majority of Americans are currently disapprove 63 percent of respondents criticized Trump’s handling of the economy, and 63 percent said they held Trump specifically responsible for recent high gas prices.
The rising tide lifts everyone up
The launch of ChatGPT in 2022 has started the race to build AI systems and the infrastructure needed to support it. Technology companies are spending hundreds of billions of dollars on artificial intelligence investments, and there is no end in sight. Thousands of data centers are being established built nationwide. This massive investment in AI has remained immune to the geopolitical events seen in the last few years.
Currently, only seven companies in the S&P 500 carry 30% of the index’s weight. These are all tech giants that have invested heavily in AI in recent years: Alphabet (Google’s parent company), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Nvidia, which makes and sells the microchips needed to power artificial intelligence, currently sits atop the S&P 500 and last fall became the first company to reach a $5 trillion valuation. Its shares are up 1,450% in the last five years.
The massive spending on AI in such a short period of time has raised concerns among those who believe there is an AI bubble holding the stock market afloat. AI spending left the consumer behind Spending as a percentage of U.S. economic growth in the first half of 2025.
“Oddly enough, we have the largest private sector stimulus program in U.S. history,” said Paul Kedrosky, an investor and research fellow at MIT’s Digital Economy Institute. “The private sector is spending very aggressively on this one thing.”
The White House is also in the middle of the artificial intelligence boom. Kevin Warsh, Trump’s pick for Federal Reserve chairman defended He says artificial intelligence is “the most productivity-enhancing wave of our lifetime, past, present and future.” Once he takes over as president, Warsh will likely advocate lowering interest rates and use the growth of artificial intelligence to bolster his argument even as inflation rises.
What is increasing…
Alan Greenspan, who served as Fed chairman for 18 years, gave a now-famous speech in 1996 in which he warned of the “irrational exuberance” of investors that was pushing markets to unsustainable highs during what is now known as the dot-com bubble.
Despite Greenspan’s warning, the S&P 500 would double in value after 1996. Then, in April 2000, when the profitability of many new technology companies began to be questioned, a huge sales wave began. By 2002, the S&P 500 was half what it was just two years earlier.
Kedrosky believes the current AI boom could experience a similar decline.
SpaceX, the parent company of three AI startups, OpenAI, Anthropic, and Elon Musk’s xAI, is planning a trillion-dollar IPO for this year.
“Just three IPOs would be bigger than the entire dot-gel bubble,” Kedrosky said. “That money has to come from somewhere. So you’re going to see big sell-offs in a number of stocks because institutions want to be able to buy them.”
In other words, investors are placing all their bets on artificial intelligence. For Kedrosky, the risk that comes with this has left him firmly convinced that it’s not a matter of if the AI bubble will burst, but exactly when it will burst.
“I would happily be wrong. This was the first time in history that we were faced with this type of situation.” [capital expenditure] I waved and things didn’t get worse,” Kedrosky said. “So history is on my side.”
