2025 in Review: The AI Resilience and the Policy Crosscurrents Ahead

The story of 2025 is one of powerful resilience. The year began with a sharp market selloff, but ended with a historic rally that propelled U.S. equities to new heights. The S&P 500 delivered a 17.9 percent total return, capping a third consecutive year of double-digit gains. The path was anything but smooth. The index plunged in the spring following the Trump administration's introduction of ultra-high "reciprocal" tariffs, which sparked global trade tensions. Yet from that April low, the market staged a breathtaking nearly 39 percent surge on a total-return basis through year-end. This rebound was powered by a confluence of forces: a surprisingly strong domestic economy, three Federal Reserve rate cuts, and, most critically, a massive wave of investment in artificial intelligence.

AI did not just move markets; it became a primary engine of economic growth. In the first half of the year, AI-related capital expenditures contributed 1.1 percentage points to GDP growth. This figure outpaced the traditional bellwether of consumer spending, signaling a structural shift. The investment surge was concentrated in tech hardware, with spending on computers and related equipment soaring 41% year-over-year, and data center construction hitting a record pace. This capital boom provided a crucial cushion, helping the economy rebound from a slight first-quarter retreat and deliver well-above-average growth in the second and third quarters.

The policy headwinds, however, were real and disruptive. The initial shock of the "reciprocal" tariffs in April created significant volatility and market stress. The subsequent stabilization was not a return to pre-tariff normalcy, but a negotiated truce. The market's recovery was directly tied to the lowering of tariff rates via trade deals and a temporary truce with China. This managed de-escalation allowed the AI-driven economic and market rally to resume its powerful momentum.

The bottom line is a tale of two halves. The first half was defined by policy shock and economic rebound, with AI investment providing the spark. The second half was a story of market resilience, where tariff turbulence was overcome by a powerful, concentrated rally in AI stocks. The sustainability of this growth model, however, now faces a critical test. The economy's dependence on a narrow group of AI-driven companies and a surge in capital spending raises questions about breadth and durability. The policy crosscurrents that were navigated in 2025 are unlikely to disappear, setting the stage for a more complex and scrutinized 2026.

The Structural Engine: AI Investment and Policy Uncertainty

The resilience of 2025 was not a fluke; it was powered by a deliberate and massive structural shift. At its core was an AI investment boom that has redefined the economic bellwether. While consumers once led the charge, the data now points to capital expenditure as the new engine. In the second quarter, investment in computers and related equipment surged 41% on the year, a figure that dwarfs traditional growth indicators. This hardware surge, driven by hyperscalers and private AI firms, contributed 4.3 percentage points to overall investment growth and helped offset declines elsewhere. The result was a phenomenon labeled "growth exceptionalism," where the U.S. economy consistently outperformed its developed market peers. Despite the shock of protectionist policies, the U.S. managed to accelerate growth into year-end, a testament to the depth of this capital wave.

Yet this powerful engine operates within a volatile policy regime. The environment has shifted from a period of relative stability to what can be described as a "regime shift" with two-way risks. The scale of President Trump's tariff measures, which exceeded expectations, created a persistent source of uncertainty. This wasn't just noise; it was a direct challenge to the low-inflation, low-rate environment that had anchored markets for years. The market's ability to absorb these shocks and rally was remarkable, but it also highlighted a vulnerability. The exceptionalism was built on a narrow foundation of AI spending, making the economy more susceptible to any disruption in that investment cycle or a reversal in the policy calculus.

This creates a complex setup for 2026. The AI investment boom remains the primary source of growth, but its sustainability is now intertwined with political and trade outcomes. The policy crosscurrents that were navigated in 2025 are unlikely to disappear, and their resolution will determine whether this exceptionalism continues or cracks. The regime shift means the old rules no longer apply, and the stability of the past decade is in question.

The Forward Path: Fed Support, Global Slowdown, and Valuation Pressures

The macroeconomic setup for 2026 is one of deliberate support meeting a subdued global backdrop. The Federal Reserve has shifted decisively to a growth-supportive stance, delivering three consecutive rate cuts to lower the target range for the federal funds rate to 3.50% – 3.75%. This move, the latest on December 10, signals the Fed's primary focus is now on employment, as it seeks to keep the economy on stable ground amid a weakening labor market. The policy pivot is a direct response to the turbulence of 2025 and aims to lower borrowing costs to encourage business investment and hiring. Yet this support operates against a global economy that is expected to slow. The IMF forecasts global growth to decelerate to 3.1 percent in 2026, a gradual slowdown from 2025's pace, with advanced economies growing around 1.5 percent. This creates a complex dynamic: the U.S. economy, buoyed by AI investment, is expected to continue outperforming its peers, but its exceptionalism may be increasingly isolated.

This divergence sets the stage for a potential performance split in equity markets. The concentrated rally in mega-cap tech stocks, which has been the market's primary driver, has left smaller-cap U.S. firms with valuations that appear cheap by comparison. This creates a clear vulnerability. If the Fed's supportive policy stance is tested by a resurgence in inflation or if the AI investment cycle begins to moderate, the broad market could face pressure. The cheap valuations of smaller caps might offer a buffer, but they also reflect a lack of growth momentum relative to the giants. The risk is a scenario where the market's breadth narrows further, with performance becoming even more dependent on a narrow set of high-flying names.

The bottom line is a setup of fragile balance. The Fed's rate cuts provide a crucial policy cushion, but they are being deployed into an environment of global economic deceleration and persistent policy uncertainty. The U.S. growth story remains intact for now, but its sustainability hinges on the durability of AI spending and the ability of the Fed to manage a soft landing. Any stumble in either pillar could quickly shift the narrative from resilience to vulnerability.

Catalysts and Risks for 2026

The narrative of 2025's AI-driven resilience now faces a critical test. The sustainability of that growth hinges on a few key catalysts and risks that will determine whether the structural shift endures or unravels.

The primary test is the durability of the AI investment boom. Its contribution to GDP growth was a powerful force in the first half, but the IMF notes that temporary factors that supported activity in the first half of 2025-such as front-loading-are fading. The initial surge in capital expenditures, which contributed 1.1 percentage points to GDP growth, was partly a response to the policy shock and a scramble to secure capacity. As this front-loading effect dissipates, the focus will shift to whether the underlying demand for AI infrastructure-driven by the next phase of model development and supporting power grids-can maintain its momentum. The sheer scale of planned spending by hyperscalers, projected to reach $342 billion this year, provides a foundation, but any sign of a slowdown in this capex cycle would directly challenge the exceptionalism that has defined the U.S. economy.

The labor market will be the primary catalyst for the Federal Reserve's next move. The central bank has already cut rates three times this year, lowering the target range to 3.50% – 3.75%, explicitly to support economic stability as job growth shows signs of slowing. Further easing is contingent on data showing the labor market is weakening further. However, the Fed's pivot is not without risk. The U.S. inflation outlook carries risks tilted to the upside, and any resurgence in price pressures could force a policy reversal. Thus, labor market data becomes a dual-purpose signal: it will dictate the pace of Fed support for growth, but it will also be the first indicator of whether inflationary pressures are re-emerging from the labor market.

Finally, the resolution of global policy uncertainty is critical for the broader growth momentum. The trade policy environment remains volatile, with the scale of protectionist measures exceeding expectations. The managed de-escalation in 2025 provided a temporary reprieve, but the finalization of trade deals, particularly with China, will be a key determinant of whether global supply chains stabilize or remain a source of friction. Concurrently, the fiscal stance in major economies matters. The IMF highlights the need for credible, transparent, and sustainable policies and notes that China's resilience vs. Germany's struggles was a defining feature of 2025. The ability of Europe and Japan to implement supportive fiscal packages will be critical for global growth, which is projected to slow to 3.1 percent in 2026. Without coordinated policy action, the U.S. growth story risks becoming increasingly isolated and fragile.

The bottom line is that 2026 will be defined by the interplay of these forces. The AI investment engine must prove it can run on its own fuel, not just policy-driven panic buying. The Fed will navigate a narrow path between supporting a weakening labor market and defending its inflation mandate. And the world's major economies must move from a regime of disruptive policy shocks toward credible, stabilizing frameworks. The outcome will determine whether the resilience of 2025 was a sustainable new normal or a temporary peak.