The ongoing stock market surge, driven by a strong rally in artificial intelligence (AI) stocks, could face significant risks if former President Donald Trump wins the 2024 election.
John Higgins, Capital Economics’ Chief Markets Economist, warned in a note to clients on July 13 that Trump’s proposed policies on tariffs and immigration could severely harm the economy.
“A second Trump Presidency could potentially result in the imposition of universal tariffs and reductions in immigration,” Higgins said.
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These changes would slow economic growth and increase inflation, creating challenges for the Federal Reserve.
Federal Reserve’s fight against inflation would take a hit
Higher inflation caused by potential tariffs would limit the Federal Reserve’s ability to cut interest rates, even if economic growth slows.
“Despite the threats to growth from such trade and immigration policies, the Fed might be less inclined to loosen policy in such circumstances,” the Senior Economist explained.
“The policies would jeopardize its victory against inflation. That, in turn, could undermine equity valuations because higher expected interest rates would drive up Treasury yields.”
This scenario presents a nightmare for the Federal Reserve, complicating its efforts to balance economic growth and inflation control.
S&P 500 will reach 7,000 before the AI stock bubble bursts
Capital Economics maintains that the stock market will continue to hit record highs, potentially reaching 7,000 by the end of 2025 before experiencing a bubble burst similar to the 2000 dot-com crash.
Higgins noted, “It’s worth recalling that the dot-com bubble burst in the wake of tighter Fed policy and higher Treasury yields.”
If Trump wins a second term and Republicans gain control of Congress, increased fiscal spending could further limit the Fed’s ability to cut interest rates. Conservative lawmakers might oppose a wider budget deficit, fearing adverse reactions from bond markets.
Even without Trump winning, Chief Markets Economist cautioned that the stock market bubble could still be at risk due to a potential slowdown in corporate earnings, the delayed impact of Fed policy on economic growth, or unforeseen geopolitical events.
Despite these risks, Higgins stands by his prediction that the S&P 500 will soar to 7,000 through 2025 before an inevitable crash.
