Kaiyuan Macro Warning: Trump's return to the White House may burst the stock market bubble early!

If former President Donald Trump wins the 2024 election, the stock market bubble inflated by the strong rebound of AI stocks may burst prematurely.

John Higgins, Chief Market Economist at Capital Economics, pointed out in a report last week that Trump's proposed tariffs and immigration policies would bring disaster to the economy.

Higgins said that if Trump is re-elected, "he may impose tariffs widely and reduce immigration, leading to slower economic growth and rising inflation."

This scenario would be a nightmare for the Federal Reserve, as the higher inflation potential from tariffs would limit its ability to cut interest rates, even with slowing economic growth.

In this situation, despite the threat Trump's trade and immigration policies pose to economic growth, the Fed may not be inclined to ease policy (if at all) as these policies would jeopardize its fight against inflation.

Higgins said, "This, in turn, would weaken stock valuations, as an increase in expected interest rates would push up government bond yields, all else being equal."

Capital Economics believes that before the bubble bursts, US stocks will continue to hit record highs, reaching as high as 7000 points by the end of 2025, similar to the situation of the dot-com bubble in 2000.

Higgins said, "It is worth noting that the dot-com bubble burst after the Fed tightened policy and government bond yields rose."

More importantly, if Trump wins the election and Republicans gain control of Congress, the possibility of a surge in fiscal spending will also set limits on the Fed's room for interest rate cuts.

The US public finances are in a more dire state than in 2016. Therefore, conservative lawmakers within the party are likely to oppose expanding the budget deficit for fear of provoking resistance from bond vigilantes.

Higgins added, "Even if not, a significant expansion of fiscal spending would give the Fed more reason to reassess its appropriate stance on monetary policy, as this would pose a threat to price stability."

Higgins believes that if Trump does not win the 2024 election, the stock market bubble will still face a series of potential risks, including a slowdown in corporate profits, the lagging impact of Fed policy on economic growth, or "unexpected events, possibly of a geopolitical nature."

Although Trump winning the 2024 election could potentially burst the stock market bubble prematurely, Higgins still maintains his view that the S&P 500 index will soar to 7000 points in 2025 and then eventually fall back