Why Trump’s Stock Market Boast Could Turn Into a Midterm Liability

In a recent campaign-style speech, U.S. President “Donald Trump” declared that “the only thing that’s really going up, big, it’s called the stock market, and your 401(k).” On the face of it, the claim holds water. All major U.S. stock indices delivered double-digit gains last year, reinforcing Trump’s narrative of economic success. But with the November midterm elections still months away, tying political fortunes so tightly to market performance may prove risky. A stock market correction — a 10–20% decline — now looks not just possible, but likely.

Markets priced for perfection

U.S. equities today reflect extraordinary optimism. By most valuation metrics, stocks are no longer merely expensive; they are priced for near-flawless economic outcomes.

The “S&P 500″’s cyclically adjusted price-to-earnings ratio (CAPE) stands at more than twice its long-term average and close to the peaks seen before the dot-com crash of 2001. The so-called Buffett Indicator — which compares total U.S. stock market value to GDP — is at an all-time high, roughly 50% above its level before the 2008 global financial crisis.

Such valuations leave little margin for error. Any economic disappointment, policy misstep, or external shock could trigger a sharp reassessment.

Sentiment signals a crowded trade

Another warning sign lies in investor behaviour. According to surveys by Bank of America, fund managers are more bullish today than at any point in the last three years. Their cash holdings have fallen to record lows, indicating that most are fully invested.

This matters because markets tend to be most fragile when optimism is universal. When everyone is already “all in,” there are fewer buyers left to cushion a downturn if sentiment turns.

Public finances and the bond market threat

One major domestic risk is the United States’ deteriorating fiscal position. Annual budget deficits have approached $2 trillion, and the country remains heavily dependent on foreign investors to finance its debt.

Concerns are also growing about political pressure on the Federal Reserve. If investors fear that monetary policy independence is being compromised — or that inflation will be used to erode the real value of debt — they may demand higher yields on U.S. Treasury bonds.

A spike in long-term interest rates would quickly feed into higher mortgage rates, auto loans, and corporate borrowing costs, weighing on both consumer spending and stock valuations.

The AI boom — and bubble risk

Another vulnerability is the possibility that the artificial intelligence boom is turning into a bubble. AI-related investment now accounts for as much as half of U.S. GDP growth, making the economy unusually dependent on a single technological narrative.

The concentration risk is striking. The so-called “Magnificent Seven” — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — together make up about 35% of the S&P 500’s total market value. Any reversal in AI enthusiasm would hit these stocks hardest, dragging the broader market down with them.

Oracle’s recent 30% stock price fall has already prompted some investors to wonder whether it could be the first warning sign.

Global shocks that could ricochet into Wall Street

External risks add another layer of fragility. China’s growth model remains heavily dependent on exports and investment, with its trade surplus now exceeding $1 trillion. That imbalance increases the likelihood of further U.S. and European protectionism — and a deeper fracture in the global trading system.

Japan, meanwhile, presents a different risk. Prime Minister “Sanae Takaichi”’s expansionary fiscal stance has raised fears of a “Liz Truss moment,” where bond yields spike abruptly. Such a shock could trigger an unwinding of the Japanese carry trade, prompting capital repatriation and destabilising U.S. financial markets.

Geopolitics and market complacency

Recent geopolitical developments underscore how quickly markets can be blindsided. The U.S. military operation against Venezuela, China’s live-fire drills in the Taiwan Strait, and Russia’s hardening stance on Ukraine all point to rising geopolitical volatility.

Even a small increase in the perceived risk of conflict over Taiwan would be consequential. Taiwan produces more than half of the world’s semiconductors; any disruption would ripple through global supply chains and financial markets alike.

Why Trump’s strategy is risky

By foregrounding stock market performance as proof of economic success, Trump has raised the political stakes of any market downturn. Equity prices are forward-looking and notoriously volatile, shaped by expectations that can change rapidly.

If markets correct in the run-up to the midterms — whether due to fiscal stress, an AI slowdown, global shocks, or geopolitical escalation — today’s point of pride could quickly become tomorrow’s vulnerability. In politics, as in finance, those who live by the market may also have to face its downside.