Love him or hate him, President Donald Trump's time in the White House has historically correlated with strong stock market returns. In fact, the benchmark S&P 500 (^GSPC +0.31%) is up by over 39% since his inauguration in late 2024, showcasing widespread optimism among many on Wall Street.

So far, excitement about his pro-business policies has helped investors overlook severe macroeconomic challenges like tariffs, inflation, and unsustainable deficit spending. Let's dig deeper to see how much longer the honeymoon period might last and determine what effect the recent midterm results may have on market performance in the near term.

Expand Index S&P 500 Index Today's Change ( 0.31 %) + 23.13 Index Level 7,376.86 Key Data Points Day's Range 7,369.55 - 7,444.20 52wk Range 6,316.91 - 7,844.52

Why markets historically like Trump

Like many Republican presidents, Trump has embraced a largely pro-business stance, passing the One Big Beautiful Bill Act, which featured tax cuts and deregulation. The administration has also struck a favorable tone toward new energy projects and data center construction, which is especially important for the U.S. tech sector as it embarks on one of its largest infrastructure buildouts in history to support generative AI.

That said, it is increasingly clear that this one industry is helping prop up an otherwise lackluster stock market and (arguably) struggling economy.

According to CME Group, the information technology sector now accounts for a whopping 40% of the S&P 500's market cap. This level of concentration is risky in and of itself. But it is also allowing Wall Street to ignore the growing scale of macroeconomic challenges in the US.

Trump gives a devastating warning to savers

Many of the biggest economic challenges stem from the administration's deliberate policies. These include Trump's tariffs, which have helped bring the average U.S. levy on all imports to around 9.6%, and the war in Iran, which has sent Brent crude prices up 55% since the start of the year.

US inflation now stands at 3.7%, well above the Federal Reserve's 2% target, forcing the central bank to keep rates elevated to control consumer prices. This has also corresponded with soaring Treasury bond yields as investors get nervous about the government's ability to manage its $40 trillion in debt.

Treasury bonds represent the risk-free rate in the economy. And when they rise, they can reduce investor appetite for risky growth stocks while also increasing the cost of capital these businesses need to expand. The Trump administration doesn't have a convincing strategy to fix these issues.

In an October interview with Time Magazine, Trump suggested that higher levels of inflation could help pay down the debt "very rapidly". The logic is that by devaluing U.S. currency, inflation will also devalue the national debt and make it easier to manage. These remarks should be taken as a warning that the administration may be willing to maintain its current inflationary fiscal policies over the coming years.

What should investors do next?

Inflation is one of the most devastating things for investors and retirement savers because it constantly erodes both savings and financial market returns. Even if you earn the S&P 500's average annual return of 10%, an inflation rate of 3.7% takes your real rate of return to a much less impressive 6.3%. That said, this isn't the time to panic.

Over the long haul, the U.S. has shown a remarkable ability to self-correct and bounce back from crises, and this time probably won't be the exception. The recent midterm results could impose some checks and balances on the Iran war and on some of the government's most extreme spending plans (such as a proposed $1.5 trillion military budget), which could help calm the bond market and bring down inflation.

Yes, the U.S. economic situation remains uncertain, but there may be light at the end of the tunnel. Investors should also focus on diversifying their portfolios across a variety of asset classes to avoid being overly exposed to downside risk in any particular one.