Volatility aside, the stock market has delivered outsize returns under President Donald Trump.

In his first, non-consecutive term, the Dow Jones Industrial Average (^DJI 0.14%), S&P 500 (^GSPC +0.58%), and Nasdaq Composite (^IXIC +1.20%) delivered gains of 57%, 70%, and 142%, respectively. Since his second term began on Jan. 20, 2025, the Dow, S&P 500, and Nasdaq have rallied 14%, 23%, and 33%, respectively.

What’s been noteworthy about these second-term gains is that they’re occurring amid an ongoing war (as of this writing on May 12). The Iran war has had a decisive impact on energy markets and U.S. inflation.

Though the president has been clear about his stance on inflation, claiming “our inflation is just short-term,” while fielding questions on the White House lawn on May 12, historical trends suggest Trump’s words may come back to haunt Wall Street.

The Iran war has sent U.S. inflation to a three-year high

Earlier this week, the U.S. Bureau of Labor Statistics reported trailing 12-month (TTM) inflation for April of 3.8%, which is up 140 basis points in two months (i.e., since the Iran war began) and represents a three-year high.

US Inflation Rate data by YCharts.

Shortly after President Trump gave the order for U.S. military forces to commence operations against Iran on Feb. 28, the latter closed down the Strait of Hormuz to commercial vessels. This closure halted the flow of approximately 20% of the world’s crude oil supply (about 20 million barrels of petroleum liquids per day).

Unsurprisingly, energy prices have soared. West Texas Intermediate crude oil has jumped from $67 per barrel the day before the Iran war began to more than $102 per barrel, as of this writing. This has driven up fuel pump prices at the fastest pace in decades, pinching consumers’ pocketbooks and leading to a sizable increase in TTM inflation.

The worry for Wall Street is that we may not have seen the worst of inflation, even if Trump is successful in quickly ending the Iran war.

Image source: Getty Images.

A second wave of inflation can wreak havoc on a historically pricey stock market

While energy supply shocks tend to hit consumers at the fuel pump within days, the adverse effects of energy supply disruptions can come in waves. For instance, we observed higher airfares impacting inflation in April.

History tells us that the inflationary effects of energy price shocks on businesses lag by a few months. But higher transportation and/or production costs are invariably passed on to consumers. Once this impact begins to work its way into economic data, U.S. TTM inflation can rise even more, despite Trump’s prediction that “our inflation is just short-term.”

Shiller PE Ratio has the Dot Com Bubble all-time high in its sight 🚨🤯👀 pic.twitter.com/XDfXBeDyxL

— Barchart (@Barchart) May 8, 2026

Rapidly rising inflation is particularly worrisome for a historically expensive stock market. Investors had been counting on several rate cuts in 2026-2027 to propel the Dow, S&P 500, and Nasdaq higher. But with the Iran war effectively taking these cuts off the table, an expensive stock market is exposed and vulnerable for the first time in years.

The velocity at which inflation is increasing might also spur the Federal Reserve to shift to a neutral or hiking bias, or even raise interest rates. This is shaping up as a potential nightmare scenario for Wall Street.

Warsh, 56, a former top Fed official, was confirmed Wednesday in a largely party-line 54-45 vote and will replace Jerome Powell as chair at an unusually difficult time for the independent agency.

Inflation has topped the Fed’s 2% target for five years and is now rising faster because of spiking gas prices. The Fed’s interest rate-setting committee is divided and saw the most dissenting votes in more than three decades last month. And Powell, after years of personal attacks from Trump and an unprecedented Justice Department investigation, plans to remain on the Fed’s board even after his term as chair ends, potentially creating a competing power center.

Senate Majority Leader John Thune, R-S.D., said in a floor speech that it’s critical that a Fed chair “understand not only the macro” but also “appreciate the microeconomy: and that’s the hardworking Americans, their jobs and their livelihoods.”

“Kevin Warsh is just such a person,” Thune said.

Trump has demanded change at the Federal Reserve

The Fed has faced threats to its independence from Trump, who has repeatedly attacked Powell for not cutting interest rates. Trump also sought to fire Fed governor Lisa Cook and launched an investigation into Powell’s Senate testimony about a building renovation.

The probe of Powell had threatened to derail Warsh’s nomination, as Republican Sen. Thom Tillis of North Carolina vowed to withhold support until the investigation was terminated. The probe was ultimately dropped in April. Every Republican voted for Warsh on Wednesday, as did Democratic Sen. John Fetterman of Pennsylvania.

Kevin Hassett, director of the White House’s National Economic Council, said in a Fox News interview on Sunday that he believes the markets are relieved that Warsh “is going to help lower interest rates over time.”

“Obviously, data driven,” said Hassett. “I’m not putting any pressure on Kevin Warsh.”

In December, Trump said on his social media platform that he wanted a Fed chair who would cut interest rates when the stock market rose — the opposite of what traditional economics would prescribe — and added, “Anyone that disagrees with me will never be the Fed chairman!”

Trump’s comments have fueled concerns over whether Warsh will set rates based on economic conditions or instead seek to appease Trump, even if doing so could worsen inflation. At Warsh’s confirmation hearing last month, Sen. Elizabeth Warren, a Democrat from Massachusetts, derided him as a “sock puppet” for Trump.

Still, Warsh denied at the hearing that Trump had pressured him to reduce the Fed’s key rate.

“I will be an independent actor if confirmed as chair of the Federal Reserve,” he said.

A critic of the Fed’s leadership in the past

Warsh has been highly critical of the Fed’s recent track record, particularly the inflation spike in 2021-22, the worst in four decades.

He has called for limiting the Fed’s communications, which would be a sharp shift after decades of growing transparency. He has argued that some of its communications tools, such as quarterly forecasts of where its key rate may head, have made it harder for officials to switch gears.

Senate Democrats have also condemned Warsh for not fully divulging the details of his wealth, which amounts to at least $100 million. His investments include stakes in Polymarket and SpaceX, but he hasn’t revealed the size of those holdings. He promised to sell all such assets within 90 days of being sworn in.

“He will be the wealthiest Fed chair in history, but he refuses to provide transparency to the American people about who he is entangled with,” Warren said.

Warsh faces difficult economic conditions

The Fed is still grappling with how to respond to the 50% spike in gas prices caused by the war in Iran. The increase has boosted inflation, which reached 3.8% in April.

The Fed is tasked by Congress with keeping prices stable, which it seeks to do by raising its short-term rate to make borrowing and spending more expensive, cooling growth and inflation.

The Fed typically looks past temporary price increases that stem from supply disruptions, such as the war’s cutoff of oil through the Strait of Hormuz, because those prices typically level off — or even fall — once supply is restored.

But the Fed also followed that approach after the coronavirus pandemic snarled global supply chains. Inflation turned out to last longer than expected, and Powell and other Fed officials have acknowledged that they waited too long to raise rates. Inflation surged to 9.1% by June 2022.

The Fed’s rate-setting committee has kept rates unchanged for three straight meetings as it evaluates the spike in gas prices. At its most recent meeting last month, three members of the committee objected to language that suggested its next move would be a rate cut. They preferred more neutral language that would allow for a hike. Many Fed watchers saw those dissents as a warning shot to Warsh that he won’t be able to easily engineer rate reductions.

A fourth member of the 12-member committee, Stephen Miran, dissented in favor of a rate cut, as he has at every meeting since Trump appointed him to the Fed’s board last September. Miran is serving until a replacement is named, and Warsh will take his spot.

Powell, meanwhile, said at a news conference on April 29 that he would remain as a Fed governor until the Justice Department closes its investigation into the Fed’s building project, the first time a chair may stay on the board for an extended period since 1948. His term as a governor lasts until January 2028.

U.S. Attorney Jeanine Pirro has dropped the government’s probe, but she has said it could be reopened if the Fed’s inspector general, which has looked into the renovation project since last July, finds evidence of criminal activity. ___

Follow the AP’s coverage of the Federal Reserve System at https://apnews.com/hub/federal-reserve-system.