2025's Winners: A Historical Lens on Sector Surges

The S&P 500 delivered its third straight year of double-digit gains in 2025, finishing the year up 17.9 percent including dividends. Yet this broad-market strength masked a deeply concentrated surge. Only three sectors-technology, communications, and industrials-outperformed the index, with the industrial sector's 19.5% return coming in a close second. The dominant driver was clear: a record wave of investment in the infrastructure needed to power artificial intelligence.

That investment reached $61 billion this year, setting a new record for the global data center market. This "construction frenzy" fueled gains across the board, from chipmakers and hyperscalers to defense firms and power infrastructure. The rally was not a steady climb, however. The market faced a significant test in the spring, approaching bear-market levels in April amid concerns over tariffs. It was only after a temporary truce with China and a renewed focus on AI momentum that the S&P 500 staged a powerful nearly 39 percent rally from the April low through year-end.

This pattern sets up the central question for 2026: Can this AI-driven momentum be sustained? The sheer scale of capital spending suggests demand is real, but it also raises concerns about potential overspending. The market's volatility and the narrowness of the rally highlight the fragility of a story dependent on a single, massive theme.

Sector-by-Sector Analysis with Historical Parallels

The structural shift in AI investment is now clear. The initial phase was a pure capital expenditure boom, and analyst estimates have consistently failed to keep pace. For both 2024 and 2025, actual AI-related capital spending by hyperscalers exceeded 50%, far outstripping the consensus forecasts that had pegged growth around 20%. This pattern of underestimation set the stage for a market that rewarded the sheer scale of spending, fueling the infrastructure rally.

But that phase is maturing. The divergence in stock performance this year signals a rotation. Investors are no longer willing to reward all big spenders equally. The rotation has been sharp: away from AI infrastructure companies where operating earnings growth is under pressure and capex is debt-funded, and toward those demonstrating a clearer link between investment and revenue. This selective focus mirrors historical patterns seen after major industrial booms, where the initial construction frenzy is followed by a market pivot to companies best positioned to monetize the new capacity and improve operational efficiency.

Goldman Sachs Research frames this next phase around two beneficiary groups. The first is AI platform stocks, like database and development tool providers, which have recently outperformed. The second is AI productivity beneficiaries, a broader set of companies where AI automation could lift earnings. While these latter stocks have underwhelmed recently, the framework suggests an attractive risk-reward for those looking beyond the infrastructure layer. The setup now is one of validation: the market is testing which companies can convert massive capex into sustainable profits, a transition that often defines the final, more profitable leg of a long-term theme.

The Tariff Counterweight: A Policy-Driven Headwind

While the AI infrastructure boom powered the market's rally, a powerful policy headwind was building in parallel. The Trump administration's sweeping tariff regime created a material drag on the economy, with the average effective tariff rate reaching 11.2 percent in 2025-the highest since 1943. This translates to a direct tax increase of $1,100 per US household in 2025, a significant economic burden that dampened consumer spending and business investment.

The impact was immediate and disruptive. The rollout of new levies on steel, semiconductors, and a wide range of consumer goods sparked international retaliation and heightened market volatility. J.P. Morgan Global Research noted these measures created material headwinds that ... weigh on growth, a clear counterpoint to the AI-driven expansion. The policy's economic rationale was further complicated by its legal standing. The Supreme Court is currently reviewing the legality of the administration's primary authority for these tariffs, the International Emergency Economic Powers Act (IEEPA), with a ruling expected in early 2026.

This pending decision adds a critical layer of uncertainty. A finding that the tariffs are unlawful could force the administration to revoke them, potentially leading to a reversal of the $1,100 household tax hike. Yet, as J.P. Morgan points out, even if the IEEPA tariffs are struck down, the effective rate may not fall dramatically, as other legal pathways remain. The bottom line is that trade policy has become a potent, unpredictable force-one that can abruptly alter the economic landscape and challenge the sustainability of any single market theme.

Catalysts and Risks for 2026

The path forward hinges on a single, critical test: the evolution of AI monetization. The market's focus is shifting from the initial construction frenzy to companies that can convert massive capital spending into tangible revenue. This transition mirrors the dot-com era's shift from pure infrastructure plays to platform and productivity beneficiaries. The next phase of the rally is likely to favor AI platform stocks, like database and development tool providers, and the broader set of AI productivity beneficiaries where automation can lift earnings. Investors are already rotating away from infrastructure firms where operating earnings growth is under pressure and capex is debt-funded, demanding a clearer link between investment and returns.

A major risk to this narrative is a sustained slowdown in AI capex growth. The consensus estimate for 2026 capital spending by hyperscalers is now $527 billion, up from $465 billion just a quarter ago. Yet, as Goldman Sachs notes, the timing of an eventual slowdown in capex growth poses a risk to these companies' valuations. A deceleration would pressure earnings for the hyperscalers and their suppliers, potentially triggering a broader repricing of the entire infrastructure complex.

Another key risk is the potential for a Supreme Court ruling to invalidate the administration's primary tariff authority. The Court is reviewing the legality of the International Emergency Economic Powers Act (IEEPA), with a decision expected in early 2026. While J.P. Morgan estimates a ruling against the tariffs may not drastically lower the effective rate due to alternative legal pathways, the prospect of a policy reversal and the resulting market recalibration carries significant uncertainty. Such a shift could trigger volatility and alter the economic backdrop that has supported the AI investment boom, serving as a reminder that trade policy remains a potent, unpredictable force.