By Bruce Murray, CEO & CIO
How Trump’s Iran War, Tariffs and Inflation Are Reshaping the U.S. Economy and Markets
Donald Trump built much of his political brand around the idea that strength produces results. Tariffs would force trading partners to negotiate, an assertive foreign policy would protect American interests, and a stronger domestic economy would bring prices under control and restore confidence.
Increasingly, the consequences of those policies are beginning to work against him. The prolonged conflict with Iran, the domestic cost of tariffs and a confrontational approach to foreign and trade policy are creating pressures that extend well beyond Washington, affecting household costs, business confidence, capital markets and relationships with some of America’s closest allies.
At the same time, Trump’s political support has weakened considerably. Approval of his handling of the economy fell to 30% in an April AP-NORC poll, while his overall job approval stood at 33%. More recent polling has continued to put his overall approval at approximately that level. With the U.S. midterm elections approaching, I believe declining political support may begin to restrict the President’s ability to pursue his agenda as aggressively as he has until now. Trump risks being “trumped” by the consequences of his own policies.
A Strong Economy, with Inflationary Pressures
The political environment needs to be considered alongside an underlying U.S. economy that we continue to believe is fundamentally strong. The massive buildout of artificial intelligence infrastructure, combined with a broader industrial economy that has largely recovered from the disruptions of the pandemic, is creating a powerful cycle of capital investment.
Data centres, semiconductors, energy infrastructure, networks and related industrial development all require enormous amounts of capital. That investment is supporting economic growth while increasing demand for money, labour, energy and raw materials. In the near term, these forces can contribute to inflationary pressures.
U.S. consumer prices were 3.4% higher in July than a year earlier. Energy prices were up 14.7% and food prices were up 3.0%. Inflation remains sufficiently elevated that the direction of interest rates continues to be an important consideration for investors. Long-term borrowing costs have also moved higher, with the 30-year U.S. Treasury yield recently trading around 5.2%.
Normally, rising interest rates eventually restrain capital spending. The sheer scale of AI-related investment makes the current environment somewhat unusual, as companies appear willing to continue investing despite higher financing costs because of the potential economic value of the technology.
Over time, we believe AI will become a powerful deflationary force. Increased productivity, automation and lower operating costs should allow businesses to produce more with fewer resources. Reaching that point will require years of investment, however, and the infrastructure required to build the AI economy could contribute to inflationary pressure during that period.
Iran Has Become a Political Liability
The war with Iran presents a growing challenge for the administration. What may initially have been viewed as a demonstration of American strength has become a prolonged conflict without an obvious strategic conclusion. That is increasingly difficult to reconcile with Trump’s previous emphasis on reducing America’s involvement in prolonged foreign conflicts.
The conflict also has economic consequences. Disruption in the Middle East has contributed to higher energy prices at a time when American households remain highly sensitive to the cost of living. Even if oil and gasoline prices eventually decline, significant increases in everyday costs can have a lasting effect on consumer sentiment.
Public support for U.S. military action in Iran stood at only 31% in a late-August Reuters/Ipsos poll. The administration therefore faces the increasingly difficult task of explaining both the strategic objective and the economic cost of the conflict to a sceptical public. As the conflict continues, that political challenge is likely to grow.
The Cost of Tariffs Is Becoming More Visible
Tariffs have always been central to Trump’s negotiating strategy. Governments can use them to protect strategically important industries, create negotiating leverage and encourage domestic investment, but they also carry economic costs.
The duty is paid by the U.S. importer. Companies can absorb some of that cost through lower margins, change suppliers or restructure their operations, but eventually a portion is generally passed through to consumers. Federal Reserve research has found evidence that the tariffs introduced since 2025 have contributed to higher consumer prices.
The burden is not evenly distributed. Imported consumer goods, manufacturers dependent on foreign components and products for which there are few domestic substitutes are particularly exposed. The Tax Foundation estimated in August that current tariffs would raise taxes by an average of $840 per U.S. household in 2026, reduce long-run GDP by 0.4% and lower hours worked by the equivalent of 345,000 full-time jobs. These are modelled estimates rather than certain outcomes, but they illustrate the economic trade-offs involved.
The President’s willingness to use tariffs against countries doing business with Iran further demonstrates the risk. Measures designed to put economic pressure on Tehran can simultaneously raise costs for American consumers and create friction with countries the United States may need as economic or strategic partners.
Inflation Connects Foreign Policy to Domestic Politics
Inflation has become the point at which trade policy and foreign policy increasingly intersect with domestic politics. American consumers expected meaningful relief from the elevated prices of recent years, yet many continue to encounter higher energy costs, tariffs, elevated borrowing costs and persistent cost-of-living pressures.
That experience is beginning to show up in public opinion. In April, approval of Trump’s handling of the economy fell from 38% to 30% in a single month, while only about one-quarter of Americans approved of his handling of the cost of living. More recent polling has continued to show overall approval near 33%.
No individual poll should be treated as an exact measure of the electorate, and every survey carries a margin of error. The consistency across several measures, however, suggests broader political weakness that investors should pay attention to. As the midterm elections approach, declining approval could increasingly affect the administration’s ability to advance its economic and foreign-policy agenda.
The Diminishing Returns of Confrontation
Trump’s negotiating style has always relied heavily on confrontation, an approach that can be effective when pressure produces rapid concessions. Its effectiveness becomes more difficult to sustain when disputes multiply, trading partners retaliate, companies delay investment and consumers encounter higher prices.
For Canada and other major U.S. trading partners, tariffs and counter-tariffs can disrupt integrated supply chains, discourage investment and cause consumers and businesses to reconsider their reliance on American products. For investors, policy uncertainty can become as important as the tariff rate itself because large capital projects depend on some degree of confidence about future costs, market access and regulation.
Trump’s negotiating brand also depends on his ability to point to visible victories. Prolonged wars, retaliatory tariffs, legal disputes, damaged alliances and higher domestic costs make those victories harder to demonstrate. As these pressures accumulate, the political benefits of confrontation may begin to diminish.
What This Means for Investors
Despite these political and geopolitical concerns, we continue to see considerable strength in the U.S. economy, supported by extraordinary levels of investment, particularly in technology and AI infrastructure.
Higher interest rates will create challenges for some sectors. Housing-related businesses, highly leveraged companies and weaker consumer businesses are particularly vulnerable when borrowing costs remain elevated. A strong economy can nevertheless coexist with higher interest rates, and historically that environment has not necessarily prevented equity markets from performing well.
The AI investment cycle also has important implications for Canada. Building data centres, power systems, semiconductor capacity and other infrastructure requires enormous quantities of raw materials, many of which Canada possesses. Increased exploration and mine development could therefore provide meaningful economic stimulus across the country as the AI infrastructure cycle continues.
At Murray Wealth Group, we continually debate these economic and political developments and consider what they mean for the securities we own. Our objective is to own high-quality companies capable of enduring difficult economic periods while participating in the structural growth opportunities that develop over time. We remain confident that our portfolios are positioned with that objective in mind.
The Donald Has Been Trumped
Several of the President’s signature policies are now interacting in ways that may increasingly constrain his political power. The Iran war is creating geopolitical and energy risks, tariffs are increasing costs and uncertainty, and persistent inflation is translating those pressures into frustration for American households. At the same time, a confrontational approach toward allies and trading partners can make international cooperation more difficult.
The political environment can change. Energy prices could stabilize, inflation could retreat and the administration could achieve clearer foreign-policy outcomes. However, the evidence today suggests that confrontation is producing diminishing returns at a time when Trump’s approval ratings are already weak and the midterm elections are approaching.
The tactics that helped establish Trump’s political brand are increasingly creating constraints of their own. For a President who has built his power on the ability to dictate the terms of the debate, the growing risk is that economic and political realities are beginning to dictate the terms for him.
