While equities, high-yield bonds and other risky asset classes raced ahead this year, government bond markets struggled to make headway. European bond markets also delivered flat performance, despite four rate cuts by the European Central Bank (ECB). The Bank of Japan was the only major central bank to raise rates this year, hence the activity in bond markets there.

Investors might have expected a similar fate for US treasury bonds, as the year began with rumours of a package of US-biased actions that included reducing payments on US government debt. The Federal Reserve itself was also not without turbulence. Investors witnessed an attempt to remove the Fed chair Jerome Powell, a scheme to remove the Fed governor Lisa Cook on charges of fraud, and the seemingly imminent and first explicitly political appointment of Kevin Hassett to the Fed’s board in 90 years.

Despite this upheaval, US treasuries outperformed other developed-world bond markets, returning 6% year-to-date. Long-term bond yields in several large countries hit lofty levels as investors lost patience with government spending plans and a failure to rein in stimulus programmes during the pandemic. Yields on 30-year Japanese government bonds increased by nearly 50% from their starting levels. The German Bund market saw 30-year yields rise by more than 35%, and the French OAT 30-year yield rose by more than 20%.

It was seemingly another strong year for the US stock market. With only a handful of trading days left to go in 2025, the S&P 500 has gained nearly 18%, including dividends. However, deeper analysis shows that if you took this year’s performance of other countries’ stock markets into account, then the US falls to the rear. China led the pack among the major markets, with returns on Hong Kong’s stock market standing at 24%, and Japan follows close behind.

Continental European equities returned 18% despite the putative outcomes of the US-EU trade deal. Even the humble UK market, which lacks significant representation from the tech sector, comfortably beat the S&P 500.

The US equity market underperformed despite the boom in listed companies related to AI. Once the US tech sector is removed from the figures, the S&P 500’s returns fall significantly. US company profits also received a boost from the 9% depreciation of the US dollar against other major currencies, helping profits growth in the US to outstrip every other developed world index.

If stock market returns were recalculated in another major currency, such as the Euro, the performance of the S&P 500 comes close to zero and the US ends up trailing. Because of this, it seemed that international asset managers eschewed US equities and turned towards domestic, and other non-US, markets. This might have caused the simultaneous underperformance of US equities and weakness in the dollar. Both these trends can be traced to the first few months of the year, when tariffs began to be imposed on other countries.

Economists’ immediate reaction to the tariff onslaught was to moderate their expectations for US economic growth. The consensus of this for US GDP growth among forecasters, which had started the year at 2.1%, fell to 1.4% within a month. Those expectations have since recovered, but did not return to their starting level.

This was despite the boom in AI-related spending, which added significantly to the economy. In the table below, we compare this outcome to the two previous years. In both 2023 and 2024, US GDP growth expectations increased by a substantial margin during the year, justifying the US’ exceptional status in terms of currency and stock market performance. Still growth was not exceptional for the US in 2025.

Again, it's tariffs that explain most of the missing GDP. The US government is likely to have collected $250 billion in additional tariff revenues by the end of the year, equivalent to 0.8% of GDP, but its reputation as a reliable trading partner was shaken nonetheless.

It’s been nearly three years since OpenAI announced its ChatGPT large language model (LLM), and the AI boom has yet to relent. As AI-related valuations have risen, the market’s appreciation of the technology has evolved. More seasoned investors are focusing on the capital expenditure required to enable an AI-powered world, how the returns on those investments will materialise, and whether future productivity gains from AI will lift growth for society as a whole, rather than just for a few industry sectors.

This debate about the future misses its impact on today’s economy. It’s estimated that AI spending increased US GDP growth by 1.1% in the first half of the year, and a similar boost will be plausible for the second half. More difficult to estimate is the influence of the technology industry on consumption.

AI-related spending has also been visible in the data covering global trade. Growth in world trade has been surprisingly robust in recent months. Notably, most of the growth has occurred in Asia, where a group of seven smaller exporters on the continent accounted for nearly 40% of trade growth in the second and third calendar quarters. The AI boom may explain this, as soaring US demand for computer equipment has led to large export gains for Asian suppliers. Taiwan's exports to the US are up 60% over the past several months, Vietnam's and Thailand's are up by 25%, and India's by 20%. Furthermore, exports were helped by tariff exemptions for key electronics products, such as semiconductors. As a result, the effective tariff rises faced by some Asian economies have been much lower than the headline rates. Without the AI boom, world trade growth would look much weaker.

Unlike the internet boom, which was more of an equity market than an economic phenomenon, the scale of the expenditure on AI has a global reach. If the bubble bursts, its impact could hit the GDP growth of both the US and its suppliers in Asia. The US economy could suffer a twofold setback, with investment suffering from a slowdown in data centre construction, but consumption also suffering as stock trading accounts tumble.

The equity market’s brief falter in November, which centred on tech stocks, unleashed a wave of scepticism, which has been compounded by the actions taken by some AI companies. OpenAI now has $1.4 trillion in commitments, equivalent to nearly 5% of US GDP, despite its cash resources supposedly totalling around $14 billion.

In private markets, growth in valuations far exceeds even the acceleration in public markets. More private AI companies are raising the idea of an IPO, suggesting that only public markets can supply the investment needed to maintain such large spending, even while scepticism grows.

At a global level, and in contrast to the US, China emphasised its own steadiness as a long-term trade partner. It spoke out in favour of global trade and followed up with its own strategy document for Latin America. This rejected “unilateral bullying” and pledged support for free trade and investment.

In response, the US committed to providing $20 billion of support for the Argentine currency in October. Within 24 hours of receiving the bailout, Argentina scrapped export taxes on grains. Within another 48 hours, buyers from China had purchased 1.3 million tons of Argentine soybeans at reduced prices. US soybean farmers got none of the orders. As the year came to an end, the US government announced a support package worth $12 billion for farmers affected by tariffs. US trade policy harks back to an era that no longer exists. Modern supply chains are now complex, multilateral and can run rings around politicians.

This could yet change and, possibly, reverse next year, at least as it relates to tariffs. A hint of this already occurred in November, when tariffs were lifted on dozens of food products. The direct economic effects were limited, but the move explicitly connects tariffs with price inflation, which is something the administration had been anxious to avoid. This might make it more difficult, politically, to wield tariffs as an instrument of policy, especially as affordability has quickly become the issue that may define the mid-term elections, due in November 2026.

There is even the possibility of a near-complete reversal of tariffs, something that would boost GDP growth significantly in an election year. The dollar would soar, sending import-inflation plummeting. Inflation would benefit further from the removal of tariffs and corporate profits would receive a boost. Almost overnight, the US would recover its exceptional status.

Aside from Canada, only large emerging markets have had the courage to refuse any trade deals on offer or cave into tariff threats, which worked well for Brazil’s President Lula. Time has helped justify the Brazilian position, as the US government recently widened tariff exemptions on foodstuffs to incorporate more Brazilian exports, but other countries are still swayed by the vagaries of economic strength as US firms have taken a sanguine view of the geopolitical risk of investing in China.

Amazon pledged to invest $35 billion in its Indian business, up from an original commitment of $15 billion. The investment will fund a huge expansion of its e-commerce capabilities. Microsoft announced that it will increase its planned investment in India to $17.5 billion, up from $3 billion, dedicated mainly to AI and cloud infrastructure. Google recently said it will invest $15 billion in India. These tech companies join a long list of industrial manufacturers that have upped their commitments across the past few months. As China becomes increasingly difficult for long-term investment by US firms, India is emerging as the default option.

Mexico's exports to the US economy are critical to its long-term growth. The government recently passed a proposal to raise tariffs on China from 20% to 50%, as well as adding to tariffs on Thailand, Indonesia, Russia, Turkey and others. Some 1,400 categories of goods will be affected, impacting $52 billion of imports (8.6% of total imports). Unlike other emerging markets, however, Mexico also stands to suffer from the diversion of Chinese goods destined for the US market. Mexico is already the biggest export market for Chinese cars and runs a $71 billion trade deficit annually with China.

Various other emerging and frontier market economies have found themselves caught between appeasing America and maintaining trade links with China. The US and South Korea finalised a trade agreement in which US tariffs of 15% were imposed on most Korean exports, but the announcement of the deal was swiftly followed by the first state visit by China’s President Xi to South Korea in 11 years. He also visited Vietnam, Malaysia and Cambodia, yet these countries still signed trade agreements with the US, imposing tariffs of 19%-20% on certain exports, but exempting others. In each case, the terms of trade with the US have deteriorated, but their competitive positions relative to each other have not changed significantly either.

The stock markets in Europe comfortably kept pace with their US peers last year, but companies on the continent failed to deliver significant growth in profits. The earnings of Europe’s blue-chip Euro Stoxx 50 stock market index have risen a meagre 5% across the last three years, while US earnings have risen by 33%. Instead of being rewarded with greater profits, investors’ returns have been due to higher valuations: the price/earnings ratio for the Euro Stoxx 50 has risen by a colossal 45% over the same period and now sits at a hefty premium to its long-term average.

Investors are understandably anxious to see signs of an economic upturn. Eurozone GDP growth in 2025 is estimated, currently, to have reached 1.4%, but this far from exceptional and follows two years of sub-1% growth. Expectations for Eurozone GDP growth in 2026 remain rangebound at just over 1%. It’s no surprise that few economists are willing to stake their reputations on forecasting a return to healthy growth in Europe.

US tariffs will not improve the fortunes of European exporters, which are caught between US trade policy on the one hand and China’s trade competitiveness on the other. Europe’s car manufacturers, in particular, look vulnerable to the threat of electric vehicles, where China excels both in technology and pricing. With the industrial sector of the Eurozone economy in a perpetual recession, and without a tech sector to generate growth, it’s difficult to see where exceptional growth may come from.

Most European governments will not be able to stimulate growth. In fact, spending constraints mean that, apart from in Germany, government spending will most likely be a modest drag on growth. This is all taking place while the continent is dealing with issues of increased between military spending with Vladimir Putin in the east and Donald Trump to the west.

Equity markets rarely price geopolitical risks until they become tangible events. Nevertheless, it’s perhaps surprising that investors have overlooked the ominous signs of a decline in relative importance. The EU accepted a humiliating trade deal with the US, while China, India and Brazil stood up to US aggression.

Three European governments collapsed during the year, in Germany, France and the Netherlands and, for the first time in living memory, the US government has openly interfered in European politics to support like-minded politicians. Political and geopolitical risks are rising, making the high valuations of the European equity market vulnerable to a correction.

The story is very similar outside the EU. Profit growth in the UK stock market has been even more lacklustre than in continental Europe during the past few years, and investors’ returns have been meagre due to changes in valuation.

The UK faces the same dilemmas as its European peers. Growth is already slowing due to ageing demographics, and copious pandemic spending has dragged on the economy. The UK must also find funds for military spending, though, notably, nothing was allocated to military spending in the recent government budget. Without much potential growth, governments will inevitably turn to taxation to control their debt burdens.

Political expediency demands that extra taxation falls on “those with the broadest shoulders”, which some may often take to translate as the wealthy. However, in today’s world, the elite or entrepreneurial can easily relocate abroad. Many European countries, apart from Italy which has revised its tax system to encourage wealthy immigrants, have suffered a substantial annual drain of relatively wealthy and skilled citizens to more tax-friendly locations. Some 110,000 people aged 16-34 years old emigrated from the UK in the fiscal year ending 2025, and the budget’s taxation of wealthy non-domestic residents and entrepreneurs may accelerate the exodus even further.

Among such complicated and intricate developments across the year, it’s clear to see how such factors have brought a new kind of global order into sharp relief. Trade has become more politicised, technology more central to national strategy and strength, and investment increasingly more selective in where it flows. Markets can no longer be analysed in isolation from geopolitics, nor policy choices separated from their economic consequences.

Looking ahead to 2026, it will be interesting to see how governments can move from reactive policymaking to coherent long-term strategy, which balances competitiveness with stability, and openness in trade with resilience at home. For investors, meanwhile, it will be down to them to recognise how the rules of the game have changed, how best to adapt to this, and where they should now seek advice to find strength and success in such a dynamic environment.