The rotation out of US equities is into its second year and going strong. The rest of the world may be having its share of problems, but underperforming stocks is not one of them. Here is a brief snapshot of how things are going in other parts of the globe, relative to the flattish ways of the S&P 500 thus far.

This got us to thinking about the last time non-US equities gripped the imagination and enthusiasm of the investing crowd. Let’s take a little trip back to the quaint world of this century’s first decade.

Swan Song for the Global Age

In hindsight, we know that it was the last gasp of the Global Age – the final five years of the quarter century in which the neoliberal trinity of open borders, light-touch regulation and unconstrained capital reigned as the unapologetic Zeitgeist. But for those of us living in those years, sandwiched in between the dot-com crash and the global financial crisis, 2003 to 2007 was just another chapter in the “end of history,” briefly interrupted from late-1990s good vibes by said bursting of the tech bubble, but with the Clinton-era directive to not stop thinking about tomorrow still circulating endlessly in our limbic regions.

The US dollar, which had risen steadily during the world’s love affair with everything dot-com, held its own during the 2001 recession, but started to falter the following year, setting the stage for what would become the great non-US equity rally of the mid-aughts.

What caused the decline of the dollar and the related move out of dollar-denominated assets? Several variables were probably at play, including the simple fact that the late-90s tech boom was almost entirely a US affair, so a “sell America” impulse was natural when that play fell out of favor. But there was more to it than that. The outperformance by international equities of almost every stripe over their US counterparts was solid, structural and sustained over this entire five-year period.

This was the period when China’s fast-growing economy blasted into its supercycle phase. Observers suddenly realized that all those jobs which had left the US due to offshoring in the 1980s and 1990s were not reappearing all over the world as hubs in an increasingly complex global supply chain. The word of the day was “decoupling,” as in the growing independence of these emerging regional clusters without the need for depending on capricious portfolio investment from Western capitals. The non-US world, and especially the emerging parts of that world, were destined to grow faster than the established West. Faster growth would mean more prosperity and, sooner or later, companies that would be every bit as good as, if not better than, their Western counterparts.

Decoupling Arrives, Twenty Years Later

Things didn’t work out that way, as we now know. The global financial crisis knocked all stock markets for a nasty loop, and the Great Recession set in. The Eurozone nearly fell apart in the early 2010s. China’s supercycle ran out of steam in the middle of that decade, prompting a major devaluation of its currency and a collapse in Chinese equities. Meanwhile central banks, led by the US Fed, took over the job of rebuilding the economy by providing ultra-cheap money. That easy money, in turn, catalyzed animal spirits in Silicon Valley to invest in audacious tech projects, some of which became extremely successful. US assets were back in favor, led by the tech giants and some of the smaller pilot fish that swam along in their wake.

Finally, though, the decoupling moment that had been imagined back in the mid-2000s arrived, last year. The old Washington Consensus of a global village unified under the neoliberal banner of free trade, judiciously overseen by the US, is gone. China is ascendant, Europe is regrouping into a post-Pax Americana order, and even Japan is showing some moxie again as the country rallies to its new and extremely popular prime minister. What all of this is going to look like five years from now is anybody’s guess. But the composition of global asset markets is likely, we think, to be quite a bit more diversified than it is today.

What’s going on in the US jobs market? Over the past couple weeks, we have received a deluge of data points about job openings, layoffs, payroll gains and – the one most people think of when someone says “labor market” – the benchmark unemployment rate. What this truckload of data has not done, though, is offer a clear picture of the current state of the labor market.

Oh, and then there is one more data point, which is the tanking stock prices of a whole bunch of companies that was the subject of our commentary last week and which has spread into more industry sectors since then. We’ll get to this, which is inevitably about AI, below. But first, the headline numbers.

A Cool Front, not a Cold Front

The one conclusion we can all probably draw from the above chart is that the overall trend in the labor market is cooling – it’s not heating up. Over the past four years, the unemployment rate has risen by about a percentage point, give or take, while the pace of monthly nonfarm payroll gains (the green columns in the chart) has declined. Indeed, nonfarm payrolls have declined in four months out of the total going back to January 2025. According to the revisions published this week by the BLS, the total number of job gains last year was reduced from 584,000 to 181,000. That’s a big drop.

On the other hand, the January 2026 numbers, which came out this past Wednesday, were much better than expected, with nonfarm payroll gains of 130,000 (versus economists’ forecasts of 75,000) and a drop in the unemployment rate to 4.3 percent. But there are several caveats to what appeared to be a blowout January jobs report. If history is any guide, these numbers will be revised at some point in the near future, and that could mean lopping off quite a bit from those 130,000 NFPs. Then there is the issue of where all the gains came from. It won’t be surprising to anyone who has been following the BLS reports in recent months that virtually all of the gains came from healthcare and the related field of social assistance – 124,000 jobs combined from those two sectors. Most everywhere else was some mix of slightly up, slightly down or flat.

Then there are the other recent reports from private sector sources. Perhaps the most eye-popping here was last Friday’s layoffs report from the firm Challenger, Gray and Christmas, showing that US companies posted the highest level of layoffs last month than at any time since January 2009, which you may recall was at the depths of the most brutal economic reversal since the Great Depression. Ouch. There were also some anemic numbers posted that same week by the ADP employment survey and the JOLTS report of job openings. The number of job openings, according to that report, was the lowest since September 2020 (which date should bring to mind yet another period of economic and social turmoil).

All told, then, the picture is inconsistent. Some of the numbers seem dire, others mildly negative, and a couple (e.g. the January NFPs) that one could use as a case for the “green shoots” optimistic types always like to trot out when they see light at the end of the tunnel or a similar shopworn cliché. We probably are closer to reality when we note that conditions are cool, but not yet cold.

The Ghost in the Data

But will the cooling trend stabilize, or are we about to get belted by a nasty polar vortex of labor market disruption? Many stock market investors seem to have made up their mind that the AI jobs apocalypse is here, a clear and present danger. The rout in software-as-a-service shares last week spilled over into a swath of other sectors this week including wealth management (that hits close to home) and brokerage services. The carnage spread even to some behemoths of the sector like Morgan Stanley, unlikely as it might seem that a firm of that size and stature could be brought low by some AI black box that eviscerates every legacy job in its path.

But that seems to be the vibe, thanks largely to recent product launches by firms central to the AI narrative like Anthropic and Google – these tools are apparently so incredible that they will automate everything, and the incumbent players who have been slow to reconfigure their operations from top to bottom will be shut out. To be clear, we think the current indiscriminate selling in the market is an overreaction, and shares in the companies affected will stabilize and recover at some point soon. However, there is probably at least a grain of truth in the potential these AI tools have to threaten the livelihoods of workers in these and other industries. It would be wise not to take too much comfort in the January job numbers as a sign of green shoots.

Silver and gold, silver and gold, sang Burl Ives as the Claymation snowman Sam in Rudolph the Red-Nosed Reindeer (apologies, sort of, for the earworm). Anyone who bought silver and/or gold a couple weeks ago is probably not singing a merry tune this week, as the price of these precious metals commenced a precipitous plummet last Friday that has continued into this week. The gold bugs can at least take comfort in the fact that they’re not alone. A wide swath of folks from crypto enthusiasts to lovers of software-as-a-service companies and hyperscale AI titans are feeling an unusual amount of pain as financial markets have shifted into an abrupt reverse. Yes, the S&P 500 is up in early morning trading today (heaven only knows where it will be by the time you are reading this). But the sentiment is edgy, to say the least. The CBOE VIX index, popularly known as Wall Street’s fear gauge, is back above 20, signaling a high degree of skittishness among market participants.

Several Walls of Worry

There may not be much commonality between the nosedive in the price of silver, say, and the problems facing tech stocks. Or is there? We’ll come back to that in a bit, but let’s talk here about the week in tech, because it has been unusual. Two prominent Magnificent Seven companies, Alphabet (parent company of Google) and Amazon, released earnings reports that could only be called blockbuster – not only beating analysts’ estimates for sales and earnings but raising forward guidance and demonstrating strength in their core strategic franchises. Both stocks are down, though, with Amazon off nearly ten percent in trading after the release of its report earlier this morning. The culprit? Among the blowout numbers reported are big, big increases in planned capital expenditures, mostly to continue funding AI infrastructure buildout and well in excess of what Street analysts had been expecting. The huge costs associated with chasing AI supremacy seem to be, finally, weighing on investor sentiment.

Why now, though, since stratospheric capex has been a central theme in the AI story for many quarters to date? It might have something to do with another wall of worry in evidence this week, in the form of a chap named Claude. Well, an AI model named Claude, which is an offering by Anthropic aimed at revolutionizing business and knowledge processes for enterprises, notably those in publishing and legal services. The problem, or at least the catalyst behind a lot of selling in the software space this week, is that Claude’s demonstrated capabilities in AI agentics could kneecap the companies that provide software as a service to these very same legal services and publishing companies, and presumably enterprises in many other industry spaces as well.

Now, to bring these two walls of worry together, the software-as-a-service companies caught in the wake of the Claude splash are also big clients of the data centers served by the AI hyperscalers like Amazon and Alphabet. All of this seems to have investors wondering who is going to benefit, ultimately, from all the capex spend and who is going to end up with a big fat negative return on investment. The AI story got a lot more complicated this week, and it is showing up in lots of different places.

Everything Is a Prediction Market

Returning to the broad-based carnage across many asset classes this week, is there anything that might serve as a thread running through them all? In traditional times, gold was regarded as a hedge asset. If you didn’t like the way things looked in the world, if the stock market seemed overpriced or the US dollar looked weak, or wars looked like they might break out, gold was where you might seek some refuge from the perceived coming storm. Indeed, for much of the past twelve months we have been hearing a great deal about gold as a hedge from financial media types.

But were people really buying gold as a hedge, or were they buying gold because everyone else was buying gold? Same for silver, same for bitcoin and other cryptocurrencies. Probably a bit of both, but we shouldn’t ignore the speculative impulse behind much of what drove prices higher, particularly this year. At its peak on January 26, silver was up 63 percent for the year to date. In other words, 63 percent over the course of 26 days. As of this morning it’s up just eight percent. Gold, in a somewhat less dramatic fashion, peaked at a gain of 23 percent before shedding 15 percent in a matter of days.

All at the same time that risk assets like stocks were falling. Not much of a hedge there, huh? It’s easy to speculate, though, when taking a position in gold (or silver, or bitcoin) is as effortless as, say, taking a position on the outcome of the forthcoming Seahawks – Patriots showdown, or how many field goals will happen in the third quarter of the game, or how many minutes into the game the first Bud Light commercial will air. Everything is a prediction market now. Including mainstream finance. That, quite possibly, is the thread running through assets of many different flavors.

It is something of a rarity when a single week contains both a policy meeting by the Federal Open Market Committee and the announcement of a selection for the next Fed chair – and that same week winds up being one of the most boring and least drama-filled in recent memory. After weeks of theatrics around the current dramatis personae of the Fed and their interest rate decisions or their office renovations or the minutiae of their personal mortgage applications, with page after page of financial media op-eds breathlessly debating the existential precariousness of an independent central bank and its place in the modern world – after all that, we get two things this week, neither of which raised ones’ blood pressure.

No Urgency on Rate Cuts

First, a very uncontroversial decision by the FOMC to leave interest rates where they are, a decision that had the same effect on markets that a reading of “Goodnight Moon” has on a sleepy child. The S&P 500 closed at 6,978.03 on Wednesday, the day of the FOMC meeting. That was exactly 0.57 points away from the level of 6,978.60 where it had closed the day before. The decision to hold rates was widely expected, the Powell press conference said little that hadn’t already been said (while Powell himself deftly deflected the many questions launched his way about subpoenas, cost overruns and other political chicanery). The stock market, which has a habit of lurching all over the place during these post-FOMC press conferences, drifted along while bond yields barely budged. Nothing to see here.

A Conventional Pick

The second event, as we all learned this morning, was the selection of Kevin Warsh to replace Powell as Fed chair when the latter’s term ends in May. As is customary with the orchestrations of the current White House, the process of selecting the next Fed chair was heavily weighted towards reality show optics, with the only constant seeming to be who could say ZIRP (zero interest rate policy) the loudest and with the most conviction. In the end, though, the man picked for the job (who will still have to clear the bar of Senate confirmation before he gets to measure the curtains in his Eccles Office Building chambers) was arguably the least controversial and, having already had one stint as Fed governor some years ago, the most familiar to Fed watchers. Warsh has his fair share of both supporters and detractors among economists and media analysts. But he was a far more conventional pick than one might have expected from this government.

What Happens Now?

A couple things have happened in the markets since news of the Warsh pick came out. The hot take seems to be a move out of inflation-hedging assets, and none more so than precious metals, the hitherto darlings of the 2026 trade. Gold is down by more than six percent this morning while silver, which has captured the fancy of the speculators this year like nothing else, is off by more than 13 percent after a couple hours of trading. Don’t feel too sorry for the long-silver crowd though, as they are still cushioned by year-to-date gains of 40 percent even after this morning’s carnage. Meanwhile the dollar has stabilized a bit and interest rates are holding close to where they have been recently.

Of course, this game is still in very early innings. Back to the substance of the FOMC meeting this week, the overall state of the economy is, well, more or less okay. Powell noted that policymaking is still complicated somewhat by the persistence of above-target inflation and a cooling jobs market. But the main gauges of both inflation and unemployment remain in yellow-flag territory and well away from anything signaling clear and present danger. It will probably help, in the short run, to have fears of an overtly political Fed and the attendant specter of hyperinflation taken off the front burner. Hey, when it comes to monetary policy, we are huge fans of as little drama as possible. But there are plenty of dragons lying in wait for Kevin Warsh, once he comes out on the other side of the Senate hearings.

Imagine if they had Polymarket and Kalshi 150 years ago. What a time the speculators of the day would have had! In 1876, major disturbances broke out all over the Balkans as people rose up, in a generally sporadic and uncoordinated fashion, against their nominal overlords running the Ottoman Empire. An uprising in Bulgaria was particularly brutal as a small band of nationalists was crushed by Ottoman troops and massacred in grisly fashion. These disturbances worried the Great Powers of the day, with Russia and newly-united Germany in particular swooping in to either try and restore order or grab a bit of land and influence where the opportunity presented itself. Serbia and Bosnia were also waking up to nationalist sentiments that would reach fever pitch in the years to come.

Prediction Markets Mania

Of course, there was no such thing as digital prediction market platforms back in the 1870s, so there was no way for, say a Vienna-based punter to make an overnight killing on the likelihood that the Ottomans would accept the establishment of an independent Bulgaria, or the odds of a Bosnian revolt against the administration of their affairs by Austria-Hungary. Today, though, these user-friendly market platforms are in full swing as the Western world reverts to the mores of Great Power politics.

And what happens on prediction platforms like Polymarket doesn’t stay on Polymarket, but jumps like a charged electron up a level or two to exert pressure on flesh-and-blood securities indexes like the S&P 500. That index was all over the place on Tuesday and Wednesday as investors placed their bets on the likelihood of a Greenland invasion, or the follow-through with another round of punishing tariffs on Europe. When, in the middle of a rambling and incoherent speech on Wednesday, the three-word chain “won’t use force” manifested, the reaction on the stock indexes was immediate, and those who had placed “no invasion” bets on Polymarket cashed in their chips. For a textbook illustration of how financial assets move in the world of today, one could do worse than to study the minutiae of Tuesday and Wednesday this week.

Lots of Events, Absence of Vision

Polymarket, Kalshi and their ilk are called “event contract” platforms, a bit of technicalese meant to distinguish them from (heaven forbid) gambling sites. They are fast becoming a central part of the mainstream financial market infrastructure. Fortunately for their executives and shareholders, there are plenty of events to wager on as this new geopolitical era dawns. Few people imagine that Trump’s speech on Wednesday marked the last time Greenland will be in the news, but never fear, there will be other “events” in the weeks ahead. And because the data around these bets (sorry, “event contracts”) tend to get instant visibility in the financial media, they have the ability to validate an imagined future outcome before the nuts and bolts behind that event have been deliberated on by those involved in and responsible for negotiations around it. We run the risk of pinballing from one crisis to the next without any kind of through-line to connect the dots. This adds a whole new dimension of risk to what observers like Adam Tooze, the Columbia professor and author of the widely-read Substack “Chartbook” call the “polycrisis,” the simultaneous presence of crises on multiple fronts, about multiple things.

This lack of vision brings back to mind those unsettled days in the Balkans in the late 1870s. The tumult seemed to die down in 1878 with the Treaty of Berlin, an ambitious attempt to keep the Ottoman Empire from completely collapsing while at the same time giving nationalists in Serbia, Bulgaria and elsewhere a bit of opportunity to express themselves but within the strictures of administration and guidance from the Great Powers. In a practical sense – though only a handful of observers realized it at the time – the Treaty of Berlin set two of these Great Powers – Tsarist Russia and the Hapsburg Empire of Austria-Hungary – implacably against each other. Germany, worried about Russia’s encouragement of pan-Slavism in the Balkans, bound itself to Austria-Hungary and then with Italy in a Triple Alliance. The bonds between Russia and France tightened at the same time and would eventually lead to the Entente Cordiale between these two countries and Great Britain.

The Concert of Europe – a global order that had managed, more or less, to keep the peace since the end of the Napoleonic Wars was thus replaced after the Treaty of Berlin by the formation of two great-power alliances that became ever more belligerent and defensive as Europe reeled from one crisis to the next, in the Balkans, in Algeria and elsewhere, before it all blew up in 1914. Such are the risks of the great power mentality that we appear to have stumbled back into. We are going to be in need of clear, strategic thinking as we move towards whatever the new world order is going to be – and we would be well advised to pay little heed to what the Polymarket “odds” that seem to accompany every news story of geopolitical import tell us.

Many things in the world changed in 2025, in some very profound ways and with very uncertain possible outcomes. Prominent among the things that didn’t change much, though, were financial markets and the global economy in general. That was something of a surprise, given the volatility we experienced during the late first and early second quarters of the year. But the volatility settled down. The direction of the economy pointed up, as did the path of risk assets. Bond yields were for the most part pliant during the second half of the year. Companies made plenty of money, and a number of them reported record sales and earnings, despite the many reasons why that plausibly might not have been the case.

Simply putting 2025 into the context of, say, the previous couple years of economic activity (both of which were likewise upward-pointing), there would seem to be no reason to think that anything had changed much in the world. American consumers continued to spend their hard-earned incomes, artificial intelligence enterprises continued to build out their sprawling empires of data centers and large language modules, and China found plenty of markets eager to import its products despite lower levels of activity with the US following the threat of higher tariffs (and imposition of some, but not all of the ones threatened). Europe muddled through yet another year of slow, but still positive, growth. In Japan, the long-reigning Liberal Democratic Party did what it does best, adapting just enough to a changing society to remain in power, helped by the emergence of a new and popular leader. Brutal wars dragged on in geopolitical hotspots, notably in Ukraine, Gaza and Sudan, but managed to avoid the catalysts that would turn a regional war into a global conflagration. At the end of it all, the S&P 500 stock index notched its third positive year in a row, up by just under 18 percent for the full year. This was the eighth positive year for the benchmark large cap index over the past decade.

Since we are now sixteen days into Year 2026 of the Common Era, it is once again time for everyone in the financial field to make bold pronouncements about the Great Rotation that is to January what the Great Pumpkin of Peanuts fame is to October (i.e., the wild imagining of an impressionable mind). It’s true that small cap and value stocks have done comparatively well in this year’s early days. And as of this morning five of the fabled “Magnificent Seven” stocks that for the past three years have served as an easy market shorthand for “AI leaders” are trailing the S&P 500. But the way we see it, this is less about the eclipse of the AI narrative, which shows no signs of going away as a core component of US economic growth, than it is about the AI story getting more complicated, with more careful parsing of where different companies actually stack up in the narrative. We’ll introduce two names in the chart below that are not part of the Mag Seven but are very much at the center of all things AI: Taiwan Semiconductor (TSMC) and Micron Technologies.

What’s In a Name

In the chart above we see outsize gains for the year so far by Micron and TSMC, up 18 percent and 12 percent respectively. Among the Mag 7 only Alphabet and Amazon are ahead of the index while Nvidia is just slightly behind and the other four (Tesla, Microsoft, Apple and Meta) trail by a wider margin. This week TSMC, which essentially manufactures all the chips that other companies design, reported another quarter of blowout earnings, growing revenue by more than 20 percent, expanding gross and operating profit margins, and raising its forward guidance by more than the consensus of sell-side analysts had expected (and they had expected a lot – the performance bar for TSMC was high). In terms of the potential impact on overall economic growth, TSMC’s capital expenditure forecast was also raised to $52-56 billion for this year alone, with more to follow. Translation: the AI infrastructure spending binge that has been the central economic story for the past three years is not slowing down. For this single reason, let alone other factors like consumer spending or net exports, we believe it remains unlikely that we will see a recession in the US this year.

One big part of that infrastructure spending binge will be on memory, in the form of DRAM chips, and that is where Micron Technologies comes into the story. Micron has been around for a very long time, and its core competency for all this time has been the comparatively dull memory segment of the chip market. It turns out, though, that the memory capabilities of Micron’s DRAM chips are essential to AI model development, and currently demand is outpacing supply. Micron is investing heavily to meet that increased demand – hence, yes, more spending that will translate into the GDP growth equation.

Tell Me Your Story

We focused on these two companies (there are others) because they reflect a general sharpening in the AI story that, we think, will lead to more dispersion among the performance of stocks in this space, rather than the simplistic “buy Mag Seven” story of yesteryear. Tesla, Apple and Meta are the names we think could be on the other end of this dispersion (though any one or all of them could perform well for other reasons – none of them are AI pure plays in any sense). As for Nvidia, which has been the big name in this space ever since ChatGPT mania took off in early 2023, it continues to maintain a solid competitive advantage in supplying the leading edge of graphic processing unit (GPU) chips to AI developers. But competition from China, while not fully formed today, will be a competitive threat the company must take into account as it charts the next phase of its strategy.

Back to the issue we raised back at the beginning of this piece, about the purported Great Rotation from the things that have done well recently to the undervalued corners of the market among value and small cap names. Will this happen, or will it fizzle out as these things often do? We don’t know, nor are we inclined to shuffle around a lot and run up big capital gains in order to find out. We are less interested in momentum-driven rotations and more interested in having a better understanding of the landscape in that part of the market situated at the center of economic growth. For now, at least, that remains the dynamic and constantly changing AI space.

Regular readers of our weekly column will know that we put very little stock in the flood of predictions made by investment houses large and small as the New Year gets under way. Who knows where the S&P 500 or the MSCI All World Index will be eleven and a half months from now? Not us, not the heads of Wall Street bulge bracket banks, not the Fed chair or the economics departments of Harvard or MIT. All manner of things are going to happen, in our country and the world at large, between now and December 31. All we can do is to say that there are some things out there that we are paying closer attention to than others. Here are five of those things, reflecting our opinions about what may have a fair chance of mattering in the year ahead. These are, of course, only our opinions.

The US economy is weaker than the numbers suggest

Perhaps the most surprising thing about the economy last year was what didn’t happen: namely, it didn’t implode. The highest tariff rates since the misguided Smoot-Hawley regime of the 1930s didn’t create runaway inflation (yet, anyway), or stop American consumers from their tried and true shopping habits. Growth surged ahead on the back of the artificial intelligence spending spree (more about that below). But “affordability” is not just a political buzzword; it is the issue that households place as number one on their list of concerns. The jobs market, meanwhile, has been weakening at a slow enough pace to keep the headline numbers well away from red-flag levels presaging recession. But that could change quickly, particularly if some of those use cases for AI show up sooner rather than later. The “soft data” survey numbers have been depressed for awhile now; we will not be surprised to see the hard data follow suit.

Fed credibility will be a bigger issue than markets are currently assuming

After the financial crisis of 2008, central banks in general and the Fed in particular became the single most indispensable part of the architecture of the global financial system. Markets await interest rate decisions with bated breath and spend much of the time in between Federal Open Market Committee meetings debating and prognosticating what will happen at the next one. So it is perhaps a little surprising that the possibility of a politically compromised Fed – an outcome with at least a reasonable probability of happening – is not showing up as a top-level concern for the market. Interest rates have been rather quiescent for much of the time in recent months. The history of political tinkering with interest rate decisions is a generally sad history, whether we are talking of the Nixon – Arthur Burns era of the early 1970s here at home or, abroad, the incessant meddling of Turkish president Recep Tayyip Erdogan in more recent memory. We will see if the calculus changes, particularly in the bond market, as Jay Powell’s term approaches its end in May, or sooner than that depending on who gets the final nod from Trump.

AI stocks may or may not take a tumble, but the infrastructure build will continue at full speed

Are AI stocks in a bubble? That was the question of the day on many mornings late last year as CNBC talking heads gathered in their virtual Brady Bunch-esque space to ponder which way markets may be heading. It is an imprecise question, obviously, as defining bubbles is as effervescent as blowing bubbles. There is certainly a distinct possibility that AI-themed stocks could pull back – into correction or bear territory, even – given their consistent outperformance over the past three years. Whatever happens to share prices, though, we expect that the frenetic pace of infrastructure building will continue. AI is the central economic story for the 2020s. We are still in the building phase, and it may be some time yet before the companies investing heavily in AI capabilities are able to clearly demonstrate proof of concept to justify the hundreds of billions of dollars invested (it also may happen sooner, in which case we may have to massively revise our assumptions about the jobs market). We think that investors will be reluctant to completely pull out of their exposure to AI names as long as the possibility remains that these innovations will lead to levels of economic productivity not seen for at least half a century. Any pullback, in other words, would be more likely than not, in our opinion, to be temporary in nature.

China will double down on manufacturing while muddling through its present woes

China’s next five-year plan, which covers the period between now and 2030, will come out in March. It should come as a surprise to nobody that the plan will be doubling down on major investments in manufacturing processes aimed at achieving global economic dominance. China demonstrated in 2025 that, apparently alone among all countries, it was able to not only withstand the threat of massive tariffs from the US, but to push back strongly and force a retreat from the Trump administration. That strength derives from its strategy, many years in the making, of building dominance in the market for rare earths metals that are key ingredients to a wide range of manufacturing processes. Having won the first round, why stop there? But as promising as China’s strategy looks for long-term success, the country continues to be somewhat flippant about the problems plaguing its present-day economy, including an eviscerated property sector, anemic household demand and the ever-present specter of deflation.

Europe will have to figure out its economic and foreign policy in a new and unfriendly world

The car industry is a good place to start when thinking about the many problems facing Europe as 2026 gets going. Time was, when Europe’s car industry was a key component of its longstanding strategy of exporting high-quality products to an eager Chinese market. Now, China manufactures and exports some of the most successful auto brands in the world, notably including electric vehicle maker BYD which surpassed Tesla last year as the globe’s largest EV maker. China is a competitor to Europe in ways that it was not just a few years ago. Meanwhile, the strength of Europe’s political alliance with the US is also a thing of the past, which has additional economic implications beyond merely the headache of higher tariffs. Patience among Europeans from Sweden to Spain is running thin. In France, Emmanuel Macron’s governing coalition is hanging on by a thread, and there is still a possibility that the coalition’s ability to stay together will run out before Macron’s official term ends in 2027. Europe does have some things to be cheery about, notably inflation that has settled back to the European Central Bank’s two percent target. And the ramping up of defense spending should help to keep growth positive this year. But time is not on the side of the rules-based EU as the rule of law fades from view elsewhere in the world.

There are no doubt many other variables at play that we have not covered here. But this is a start. Let’s get to work.

Well, here we are. 2025 is coming to an end and we have somehow made it through. Yay! There are plenty of things we could dwell on as standout themes for the year gone by, but the one that looms largest in our minds is – not for the first time and probably not for the last time – the resilience of the global economy. Let’s look at some of the ways we managed to survive the year, economically speaking, when there was so much change afoot.

Ghosts of the 1930s

Two senators of a bygone era became a big part of the economic Zeitgeist this year. Reed  Smoot of Utah and Willis Hawley of Oregon were the driving force behind the Smoot-Hawley Tariff Act of 1930, an act part and parcel of the isolationist tack American politics had taken since the early 1920s and one that poured more cold water on a world economy already freezing from the onset of the Great Depression. Since then, critics of tariffs in general have never hesitated to call on the haunting specter of Smoot-Hawley to argue for why an exorbitant tax on goods coming into the US is a bad idea.

So when the Trump administration trotted out its “Liberation Day” tariff schedule on April 2, with tariff rates that in many cases soared past the levels of Smoot-Hawley, a tidal wave of criticism ensued. Financial markets tumbled in the wake of the April 2 announcement at levels suggesting that another Great Depression was in the offing. Famously, the administration backed off (“TACO-ed” in the wry parlance of Wall Street) and held off (indefinitely, as it turned out) on those nosebleed levels. Still, though, after all was said and done, the average tariff rate on imported goods into the US remained around 17 percent – the highest since, yes, the days of Smoot-Hawley in the early 1930s.

Not Your Great-Grandfather’s Economy

And yet, there was no Depression, no recession even. In fact, the US economy has grown at a higher pace this year – so far, given that we only just got the third quarter numbers last week and won’t have Q4 data until later in January – than at any time in the post-pandemic period. Inflation, which was supposed to skyrocket, has been relatively subdued even if still stubbornly stuck above the Fed’s two percent target. Unemployment has been trending up, but remains far away from the levels usually associated with a sharp economic reversal. Outside the US, countries that were on the receiving end of the tariff shock have mostly kept on keeping on – notably China, which has successfully managed to find other markets to offset the slowdown in its level of exports to the US.

What is important to bear in mind here is that the economy of 2025 bears very little resemblance to the one of the 1930s. For one thing, it is an economy far more dominated by a wide variety of services than was the case 95 years ago. Tariffs did, clearly, have a major impact on certain categories of goods, notably raw materials like steel and foodstuffs like coffee, among many others. But their impact on many domestic services was more muted. Price changes were thus varied and reflected many more driving forces than tariffs alone, such as a greater level of consumer pickiness in making discretionary spending choices (recall our comments last week about the so-called “K-shaped” economy).

Another way today’s economy differs from that of our great-grandparents is the outsize role played by investment in technology. Today, of course, the main event in this space is the multi-billion dollar race for dominance in artificial intelligence, the fruits of which probably accounted for around half of the total growth rate of real GDP this year. It remains unclear how much of this massive investment spree will translate into measurable productivity gains – but that is a question for another day.

Globalization and Global Order

We will leave this discussion with a couple notes on a topic you will be hearing a great deal about from us next year. One of the popular sentiments expressed in the financial media in recent years has been the so-called end of globalization. This formulation mixes up a very broad term with a more narrowly defined one. What has ended is not globalization, which simply refers to the act of seeking and utilizing sources of wealth outside one’s home market. Globalization has been going on since the fifteenth century, and will continue going on indefinitely.

What ended – and really, what ended many years ago – was the cultural dominance of neoliberalism. Neoliberalism is the narrower term we noted above. It refers to a belief in free trade, open borders and minimal interference from government-backed regulation as the best prescription for global growth. While there were always plenty of naysayers and critics, neoliberalism dominated economic thought and practice from the early 1980s to the late 2010s – a period we refer to as the Global Age. And even at its peak, in the heady years following the end of the Cold War in 1991, the nuts-and-bolts components of neoliberalism were more of an aspiration than a real description of how countries in the real world traded and dealt with each other.

More importantly to us today, the Global Age was the second act of a global order that began after the Second World War, an order entirely dependent on the active leadership of the United States and a strong alliance among the nations of the West (a term less useful as a geographic descriptor than as an alliance of shared values and democratic commitments). When the Global Age ended, not long after the 2008 global financial crisis, the Pax Americana global order started to weaken as well. We are of the opinion that we finally lost it, likely for good, this year. What will emerge as the new global order is very much unknown as we head into 2026. The good news, though, is that we begin the new year with a global economy still resilient, still adaptable, and still able to somehow steer through the fog.

More to come on all of this in the year ahead. May the New Year be a happy, healthy and prosperous one for you and yours.

Sometime earlier this year we wrote about the disconnect between so-called “hard” and “soft” economic data. Hard data points include the headline numbers of inflation, unemployment and GDP growth, while the concept of soft data refers to surveys about how different cohorts in the economy – households, small businesses and the like – feel about the current situation and their near-term prospects. When we wrote about this during the first quarter of 2025, the disconnect was reflected as negative sentiments expressed in the “soft” surveys while the “hard” macro numbers seemed to validate an economy that was still performing relatively well.

Gross Domestic Skepticism

Well, that disconnect trend is alive and well as 2025 draws to a close. This morning we received the report on gross domestic product for the third quarter, after a two-month delay during which the Bureau of Economic Analysis, which produces the GDP report, was offline as a result of the government shutdown (the economic effects of said shutdown may show up in some form when the Q4 report comes out next month). For anyone hoping for a good growth story to see out the year, this report delivered it. The economy grew in real (inflation-adjusted) terms by 4.3 percent (annualized) from the beginning of July to the end of September. Consumer spending continued to surpass economists’ expectations, defying the widely-held concerns earlier this year of a consumer pullback. Meanwhile, investment in the building blocks of artificial intelligence continued apace, and somehow we also managed to export more than we imported during the quarter (a positive balance for net exports is additive to GDP). Economists did caution that the slowdown that didn’t happen in Q3 may be on tap for Q4 – but that’s a problem for another day, right? Meanwhile, the US economy’s often surprising resilience remains intact.

A little while after the GDP report came out, though, we got another wet blanket of a sentiment indicator. The Consumer Confidence Index, published by the Conference Board, weakened for a fifth consecutive month and remains well below its peak at the beginning of the year. One of the major areas flagged as a concern is the job market, with fewer respondents saying that job opportunities are plentiful, and more characterizing jobs as “hard to get.” The news wasn’t all bad – there was a slight drop in the percentage of respondents saying that a recession in 2026 was “very likely” – but for the first time in more than three years, the percentage of people saying their current family situation is bad was greater than the number saying that things are good.

Brought to You by the Letter K

If you have been reading articles about the economy recently, chances are that you have come across the concept of the “K-shaped” economy, with the upper slant of the K representing the increasing prosperity of wealthy Americans while the lower slant signifies the mounting struggles of their worse-off counterparts to keep up with higher prices, stagnant wages and fewer opportunities for moving up (or getting into the labor market at all, if you are a young job-seeker coming right out of college and wondering what on earth happened to those jobs you thought would be there as you grabbed your BS degree in computer science). Much of that resilience in consumer spending this year we noted earlier has come thanks to the fortunes of the upper deciles of income-earners, while establishments that cater more to those in the middle or lower end of the scale, such as McDonalds or Walmart, have supplied evidence of greater constraints experienced by their clientele. This dispersion of conditions explains at least some of the disconnect between hard and soft data. Reports like the Consumer Confidence Index contain a mix across all income and demographic categories, so dissatisfaction with the present state of play is likely to come through when all the responses are tallied up – eight deciles of “not so great” versus two of “doing just fine, thanks for asking.”

Can the fortunes of a K-shaped economy get us through another twelve months? As we pore through the various musings of our peers in the economics world, the overall sense seems to be that 2026 will be a pretty good year. Not great, but not terrible. We’ll see. Sentiment can shift on a dime, and right now the sentiment seems mostly influenced by how much better 2025 turned out than many imagined back in the first few months of the year. We are pretty confident that there will be unexpected hits to the collective, conventional wisdom from all sides.

For those who celebrate, have a very Merry Christmas.