Why Global Markets Outperformed the S&P 500 in 2025 and What This Means for 2026

In 2025, global markets defied expectations by outperforming the S&P 500, a trend driven by a confluence of geopolitical upheaval, policy shifts, and a surge in AI-driven innovation. While the U.S. market faced turbulence from protectionist policies and trade wars, international markets demonstrated resilience and adaptability, positioning themselves for sustained growth. This analysis explores the key factors behind this divergence and what they signal for 026.

Geopolitical and Policy-Driven Market Leadership

The year 2025 was marked by a dramatic escalation of U.S. protectionism under President Donald Trump's "America First" agenda. The imposition of sweeping "Liberation Day" tariffs in April 2025 pushed the U.S. effective tariff rate to nearly 17%, the highest since 1935. These tariffs triggered immediate market volatility, with the S&P 500 losing over $5 trillion in value during a two-day selloff. However, the U.S. economy's resilience-bolstered by a 4.3% GDP growth in Q3 2025-masked underlying fragilities, while global markets adapted to the new trade landscape according to market analysis.

Geopolitical tensions further amplified uncertainty. The Russia-Ukraine conflict and the Israel-Hamas war disrupted energy supplies, forcing Europe to accelerate its shift away from Russian gas and invest in alternative energy security strategies. Meanwhile, cyber warfare and supply chain vulnerabilities prompted nations to prioritize reshoring and geographic diversification according to market research. These disruptions, though costly, catalyzed long-term structural changes in global trade and investment patterns.

AI and Tech Sector Growth: A Global Catalyst

While the U.S. tariffs created short-term chaos, they also accelerated AI-driven growth. According to Deloitte's 2025 tech value survey, 74% of organizations globally invested in AI and generative AI, with 88% using AI in at least one business function-up from 78% in 2024. McKinsey's global AI survey highlighted that high-performing companies leveraged AI for efficiency, innovation, and cost reduction, with 80% prioritizing efficiency and top performers emphasizing growth.

Capital expenditure on AI infrastructure surged, with hyperscalers projected to invest over $500 billion in 2026. This spending was not confined to the U.S. Emerging markets transitioned from resource-based economies to tech-driven powerhouses, leveraging AI to reshape global trade dynamics. South Korea's M.AX strategy, for instance, positioned the country as a top-three AI leader by integrating AI into manufacturing and defense according to industry analysis.

The U.S. dominated global AI investment in 2025, attracting $109 billion in private funding-81% of the global total. This surge was partly fueled by the perception that tariffs validated domestic technological priorities, leading to premium valuations for U.S. AI firms. However, this dominance came at a cost: the semiconductor industry faced volatility due to supply chain reconfigurations and reliance on rare earth elements according to industry analysis.

In contrast, China's private AI investment declined from $16 billion in 2018 to $5 billion in 2025 according to market data, yet it maintained a leadership role in open AI models like Alibaba's Qwen. The EU, while attracting $8 billion in AI investment, struggled to balance regulatory oversight with innovation, particularly for SMEs according to industry reports. Meanwhile, countries like the EU, UK, and South Korea negotiated trade agreements to mitigate U.S. tariff impacts, while China diversified its exports and leveraged rare earth mineral dominance according to market analysis.

Implications for 2026

The 2025 market dynamics suggest a pivotal shift in global economic leadership. For 2026, three trends are likely to shape markets:
1. Tariff Uncertainty and Legal Challenges: The U.S. Supreme Court's ruling on the legality of IEEPA-based tariffs in early 2026 could either stabilize or further disrupt trade flows.
2. AI-Driven Growth Acceleration: With global AI spending exceeding $500 billion in 2026, the U.S. will maintain its computational edge, but emerging markets and the EU could close the gap through strategic investments.
3. Geopolitical Realignment: The U.S.-China trade truce of October 2025, while temporary, signals a potential shift toward managed competition rather than outright conflict.

Investors should prioritize regions and sectors that have demonstrated adaptability to geopolitical and policy shocks. South Korea's Kospi, which outperformed the S&P 500 in 2025, exemplifies how AI integration and supply chain resilience can drive returns. Similarly, emerging markets leveraging AI for systemic transformation-such as China's "AI+" strategy-offer long-term growth potential.

Conclusion

The 2025 market outperformance of global indices over the S&P 500 underscores a broader realignment of economic power. Geopolitical tensions and protectionist policies created short-term volatility but also accelerated AI-driven innovation and supply chain resilience. As 2026 unfolds, the interplay between policy shifts, technological investment, and geopolitical strategy will define the next chapter of global market leadership. Investors who align with these trends-particularly in AI, emerging markets, and supply chain diversification-will be well-positioned to capitalize on the opportunities ahead.