AI Boom & Trump's Policies Drive Volatile Market Gains

What Happened

Donald Trump’s re-election promised to supercharge the stock market, and it certainly delivered an impressive 18% climb for the S&P 500 Index. This propelled the market to a record high by October, extending a six-month winning streak since Trump’s victory on November 5th. Initial hopes for an economic boom were pinned on his agenda of sweeping tax cuts and deregulation, promises he largely fulfilled. However, it was his unpredictable trade policies that truly dictated the market's trajectory.

His stop-and-go approach to tariffs and negotiations pushed policy uncertainty to levels unseen since 1900. This unleashed significant volatility across equities, most dramatically in April, when he announced the toughest tariffs in nearly a century. Dean Curnutt, CEO of Macro Risk Advisors LLC, described this as one of the most “dramatic explosions of market volatility we’ve really ever seen.”

Without another surge of enthusiasm around artificial intelligence (AI), these market gains might have been far more restrained. The rally heavily concentrated in Big Tech firms, leaving traditional sectors like manufacturing and consumer goods lagging amid trade tensions and slower growth. To highlight this imbalance, an equal-weight version of the S&P 500 is up just 5.2% for the year, underscoring the dominance of mega-cap tech stocks. The median stock in the index gained a paltry 1.2%.

The AI excitement, despite a brief hiccup in January tied to China’s DeepSeek app, has propelled Nvidia Corp. to become the first $5 trillion company. Meanwhile, Apple Inc. and Alphabet Inc. each surpassed $4 trillion in market value. Collectively, the seven largest technology firms accounted for more than half of the market’s overall advance. Trump also actively intervened in markets, pushing Intel Corp. shares higher after the company granted the U.S. government a 10% stake in exchange for grant funding. Similarly, his administration required an equity stake in U.S. Steel for deal approval and took ownership positions in small mining companies deemed critical for national security, boosting that sector. His outspoken criticism of the Federal Reserve, including attempts to oust one of its officials, further contributed to financial market jitters.

Why It Matters

While an 18% gain since the election is nothing to scoff at, it appears more modest compared to the prior year’s 36% jump. U.S. equities now surprisingly rank just 54th globally, trailing markets in Canada, Japan, and Germany. Historically, Trump’s current post-election performance ranks eighth out of all first years following presidential elections in the past 80 years, placing him behind Joe Biden, Bill Clinton, Barack Obama, and Franklin Roosevelt’s final term, according to CFRA data.

Consumer-facing stocks have been among the hardest hit. Shares of Chipotle Mexican Grill Inc. plunged last week after the company warned of softer customer demand. The consumer staples sector has also weakened as tariffs pressure profit margins. Materials stocks, down roughly 8%, faced similar headwinds, contending with higher input costs from global suppliers, particularly in China. This paints a clear picture: the broad economy isn't feeling the same glow as tech, highlighting a significant disconnect.

Despite these challenges, Dean Curnutt noted that the allure of AI has made it “impossible not to be in the U.S. stock market.” He pointed to the market’s depth, liquidity, and broad participation as reasons investors continue to stay engaged despite recurring risks. Alonso Munoz, chief investment officer at Hamilton Capital Partners LLC, described investors’ conviction that AI is still in its early growth phase, with breakthroughs continuing to outpace expectations. Munoz shifted his portfolio in April, trimming defensive holdings to increase exposure to machine-learning leaders such as Alphabet.

Michael Dickson, head of research and product development at Horizon Investment LLC, expressed more confidence today than a year ago. He noted that investors were previously uncertain about the scale of AI infrastructure spending and which segments of the supply chain would benefit most. Now, he stated, “we have a clearer picture and the upside potential is keeping traders invested despite the noise.”

Our Take

Here’s the unvarnished truth: the market’s impressive headline numbers tell only half the story. We’re witnessing a classic tale of two economies. One is propelled by the almost unstoppable force of generative AI, minting trillions in market value and creating new industry leaders. The other is grappling with the unpredictable, protectionist policies of a sitting president. This divergence creates a dangerously concentrated rally, where a handful of tech behemoths dictate overall market performance, leaving many traditional sectors struggling and a substantial portion of the S&P 500 stagnating.

Furthermore, while the artificial intelligence boom continues to excite, the persistent policy uncertainty from Trump’s administration casts a long shadow. His willingness to directly intervene in corporate dealings and challenge the Federal Reserve introduces systemic instability. This could, as Curnutt suggested, wear down investor confidence over time. These unpredictable shifts mean the market isn't truly “anti-fragile.” It’s susceptible to external shocks, especially if tariffs eventually trickle down to strain consumers. Rising costs could also complicate the Federal Reserve’s anticipated interest rate cuts, leaving investors in a precarious position. Investors now face a stark choice: the risk of a market correction due to stretched valuations, or the fear of missing another powerful AI-driven rally.

Conclusion

The market is currently performing a high-wire act, caught between the undeniable power of AI innovation and the unpredictable currents of political policy. Navigating this landscape requires a nuanced approach, looking beyond headline numbers to understand sector-specific performance and underlying risks. While the “AI trade” is compelling, the broader economic ripple effects of tariffs and potential inflation cannot be ignored. The market’s future hinges on how effectively the transformative power of advanced algorithms can continue to offset—or at least coexist with—the unpredictable currents of governmental policy, all while potential productivity gains from AI may still accelerate the broader U.S. economy faster than expected.