Trump’s inflation push fuels record‑high stock valuations

Jerome Powell’s final remarks as Fed chair – “equity prices are fairly highly valued” – landed on May 15, just as the Shiller CAPE Ratio hit 42.32, the second‑highest reading in history [1]. The comment came amid a surge in inflation that the Trump administration’s tariff policy and the ongoing Iran war have driven to a three‑year high of 4.18% for May, according to the Cleveland Fed’s now‑casting model [2].

Powell’s warning echoed Alan Greenspan’s 1996 “irrational exuberance” warning, but it arrived at a moment when the market’s price‑to‑earnings gap is wider than almost any prior episode. The CAPE, which smooths earnings over ten years to strip out short‑term cycles, averages 17.36 since 1871; the current 42.32 level is only behind the 44.19 peak that preceded the 2000 dot‑com crash [1]. Historically, six instances of a CAPE above 30 have been followed by index declines of 20%‑89% [1]. The combination of a “fairly highly valued” equity market and inflationary pressure from Trump‑initiated tariffs – especially on steel and other unfinished goods – raises the risk that the rally could stall.

The inflation story is tied to two distinct policy moves. First, Trump’s sweeping global tariff, launched in April 2025 and partially revived after a February 2026 Supreme Court decision, has pushed input costs higher, a factor Powell repeatedly cited as a source of price stickiness [2]. Second, the Iran war, ignited by Trump’s February 2026 order to attack Iran, has choked the Strait of Hormuz, cutting roughly 20 million barrels per day of oil flow. Gas prices jumped $1.56 per gallon for regular fuel since the conflict began, feeding the broader inflation surge [2].

Investors have so far shrugged off these pressures, with the Dow up 16%, the S&P 500 up 25%, and the Nasdaq up 34% since Trump’s second term began [2]. Yet the market’s “premium” valuation, buoyed by AI‑driven growth expectations and hopes for further Fed rate cuts, sits on a narrow margin from the dot‑com bubble peak [2]. If inflation continues to climb and the CAPE breaches the 44‑point ceiling, history suggests a sharp correction could follow.

The real question now is whether the Fed will tolerate the inflated equity market while battling Trump‑driven inflation, or whether policy tightening will finally bring the CAPE back toward its long‑run average.