What Happens When Markets Turn Upside Down
The Fight At The Fed
Well here we are. Trump seems to think that the Federal Reserve should lower interest rates. In fact, he’s made it clear that he thinks the Fed should lower interest rates even when the stock market is going up.
He points out in that clip that he believes that when there is good news then the market should go up. What he’s pointing to here is the fact that for instance CPI came in directly in alignment with expectations and Core CPI in particular came in a bit lower than the previous read, yet stock markets remained unaffected and actually slightly negative.
Stock prices reflect the present value of expected future earnings/dividends.
When interest rates are low, stocks tend to trade at higher multiples (P/E ratios expand) because lower rates reduce discount rates. A discount rate is the percentage used to convert future cash flows into their present value, reflecting the time value of money and investment risk. In practice, it is anchored to the risk-free rate (U.S. Treasury yields) plus a risk premium for owning equities.
In simpler terms, investing in stocks becomes easier to justify when investors are comparing stock returns to the return available on U.S. Treasuries, which are generally treated as the risk-free benchmark. When Treasury yields are low, the relative attractiveness of taking equity risk increases and therefore demand for stocks rises.
When rates rise (or are expected to stay higher for longer) → discount rates go up → those same future profits are worth less today → multiples contract, stocks fall.
The idea that inflation coming down should be good news for markets means that the Federal Reserve should be able to lower interest rates without the fear that lowering interest rates will lead to more investment and therefore a hotter economy and then higher inflation.
But, right now, the Fed has pointed out that the labor market is not necessarily in a lot of pain and has mentioned in the past that it is afraid that inflation has a chance to pick back up due to tariffs. So even though the market got good news today (lower Core CPI), traders have priced in an even lower chance of the Fed cutting rates at its next FOMC meeting on the CME FedWatch Tool.
Markets interpret soft-but-not-disastrous inflation as “the economy is fine without needing immediate help” which means fewer or delayed rate cuts priced in → higher-for-longer discount rates → pressure on valuations (especially growth stocks).
Now Trump is saying that such logic should not be the case and this is sending a stark warning for the investment world. Once Jerome Powell is out at the Fed (one way or another), we are likely to see interest rates come down quickly. Now what we have to keep in mind here is that the Trump administration is doing everything it can (not short of “capturing” a sovereign nation’s leader) to keep oil prices down and with this being the case there will be room for heightened levels of investment within the country without running into the problem of high inflation.
I expect that 2026 may be pointing toward a historic rise in the stock market while the U.S. also does its best to tackle the affordability issues at the same time, allowing the federal reserve to continue lowering and maintaining low interest rates while that happens. All of this could potentially lead to a further acceleration of investment throughout the economy which is exactly what the U.S. needs if it wants to keep up with China in the A.I. race.
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