Weekly market commentary

AI boost
Contributions to annual U.S. GDP growth, 2000-2025

2025 was a unique year for markets. The April 2 tariff announcements sparked the worst one-week selloff in the S&P 500 since the pandemic, yet stocks posted double-digit gains for the third year in a row. U.S. Treasuries also delivered solid returns even as fiscal pressures and sticky inflation caused investors to demand more term premium. Higher term premium hurt the U.S. dollar, raising questions about its reserve currency status. Those questions subsided, as we anticipated, but a weaker U.S. dollar and Federal Reserve policy easing boosted global stocks: the MSCI EM Index rose 30% versus the S&P 500’s 16%, in dollar terms. Gold surged over 60% in a risk-on year as a diversification play became a return driver. And the AI buildout drove about half of U.S. growth, with investment’s contribution to GDP nearly triple its 2000 to 2019 average. See the chart. Why such resilience?

We think the U.S. economy’s resilience partly stems from our first lesson: immutable economic laws – such as supply chains can’t be rewired overnight – mean the world can’t change quickly. Markets were whipsawed many times this year, but we thought such laws would prevent a maximal stance on tariffs and other policy changes that sparked so much uncertainty in the first half of the year. That played out: U.S. stocks rebounded from April’s selloff, with the S&P 500 gaining 16% last year.

Powerful mega forces can trump the macro

Our second lesson – powerful mega forces can trump the macro – helped us look through the noise and kept us pro-risk on the strength of the AI theme, another call that played out. The macro anchors that markets relied on for decades, like stable inflation expectations and fiscal discipline, have weakened. Instead, a few mega forces are driving structural transformation, with AI emerging as the dominant one. Because there is no “neutral” portfolio allocation in this environment, investors should focus on owning their risk deliberately rather than spreading it – a more active approach, in our view. Identifying manager skill will be key for spotting those who can find the winners as AI gains spread across the economy, as well as for other idiosyncratic sources of return like private markets and hedge funds.

We also see the future of finance mega force evolving far more rapidly than expected – our third lesson – as adoption of stablecoins and tokenization increases. The 2025 Genius Act established the first U.S. framework for payment stablecoins – digital tokens pegged to a fiat currency and backed by liquid reserves. The law bars interest payments, but a “marketing rewards” provision permits yield-like incentives. That allows competition with bank deposits or money market funds, potentially impacting how banks provide credit and current global payment systems. If broadly adopted in emerging markets as a local currency alternative, stablecoins pegged to the U.S. dollar could even help cement its reserve currency status and partly offset current negative sentiment and positioning on the dollar. Tokenization, which involves recording asset ownership on digital ledgers, allows for instant settlement and could widen access to illiquid private market asset classes.

Our bottom line

2025 pushed limits on multiple fronts, with constraints biting in some cases (trade policy) and new ground broken on others (AI investment and financial innovation). We track these mega forces into 2026 and stay risk-on for now.

Market backdrop

The S&P 500 surged 16.6% in 2025. Mega cap tech names remained the key drivers of the AI theme, though concerns over frothy valuations made it a bumpy ride: Nvidia’s market cap at one point lost 35% before the firm became the world’s first $5 trillion company. Markets expect more Fed policy easing and have slashed their year-end 2026 rate expectations to about 3%, LSEG data show. U.S. 10-year Treasury yields fell 42 basis points during the year to 4.15%.

The U.S. data calendar starts to normalize this week, with the regularly scheduled payrolls data for December coming out at its usual time on Friday. We eye a cleaner read on the labor market and inflation in coming months given the noise of the October-November data. For example, the unemployment rate rose to 4.6% in November – yet some of this was the temporary impact of the government shutdown and could be quickly reversed.

Read our past weekly commentaries here.