Investors are closely monitoring inflation trends this week as the recent stock market surge, spurred by Donald Trump’s re-election as U.S. president, faces a key test. Buoyed by expectations of tax cuts and relaxed regulations under Trump, the benchmark S&P 500 reached an all-time high, breaking the 6,000 mark on Friday, as enthusiasm for equities soared.
This optimism was further boosted by a 25-basis-point interest rate cut from the Federal Reserve on Thursday, aimed at maintaining economic stability. However, the central bank’s path forward could hinge on upcoming inflation data. “The Nov. 13 consumer price index report needs to confirm that notion that inflation continues to head in the right direction,” stated Art Hogan, chief market strategist at B Riley Wealth.
While the S&P 500’s historic performance reflects market optimism, analysts warn that inflationary pressures could emerge from Trump’s economic policies, including his stance on tariffs, which some believe may lead to higher consumer prices. Strong recent data has shown the U.S. economy grew at a 2.8% annualized rate in the third quarter, adding to inflationary concerns.
Economists expect the October CPI to register a 2.6% annual increase, slightly higher than September’s 2.4% rate. Although this level remains far below the peak inflation of 2022, when the Federal Reserve implemented aggressive rate hikes, even a modest rise could challenge the Fed’s ability to continue lowering rates. According to Fed funds futures, investors now anticipate a rate of 3.7% by the end of 2025, down from the current 4.5%-4.75% range.
Michael Reynolds, vice president of investment strategy at Glenmede, noted that “the neutral level for the Fed funds rate was about 3%.” He added, “We ultimately think that they do take that shallow path because inflation is still a risk.”
Trump’s economic agenda could drive inflation higher, while also stimulating growth during his presidency. Jim Baird, chief investment officer with Plante Moran Financial Advisors, explained, “We’re a long way from knowing specifics around either tax policy or trade policy, but those are both on the table and will undoubtedly weigh into the Fed’s calculus as they look ahead from here.”
The market has already begun adjusting to Trump’s victory, with the Russell 2000 small-cap index rising 8% for the week. Smaller companies, which are more reliant on the domestic economy, are expected to benefit from Trump’s tariff policies. Additionally, the S&P 500 banks index climbed around 7%, reflecting optimism over potential regulatory rollbacks expected under the Trump administration.
The election’s impact is not confined to equities alone. Bitcoin surged to an unprecedented high on Sunday, breaking the $80,000 mark as investors anticipated that Trump’s return could foster a more favorable regulatory environment for digital currencies. Trump, previously a critic of cryptocurrencies, has since embraced the sector, even introducing his own platform and pledging to make the U.S. the “bitcoin and cryptocurrency capital of the world.”
As Trump’s team prepares for the transition, with his proposed policy details expected to emerge in the coming weeks, analysts are warning of further market volatility. “Markets have started to digest Trump’s victory,” UBS Global Wealth Management analysts commented. “As more detailed policy proposals emerge from the Trump transition team, investors should brace for further swings ahead.”
This period of rapid adjustment and high expectations is poised to define the trajectory of the stock market and broader financial landscape as investors assess the full implications of the incoming administration’s economic strategies.
