As the world has its fingers crossed waiting for the verdict on tariffs from the US Supreme Court, the US President Donald Trump would complete his first year in office on Tuesday. It was an eventful year to put it mildly — the kind that puts twist-laden thrillers to shame. The Oval Office kept buzzing with one executive order after another — on tariffs, immigration, DOGE, oil drilling, brokering peace and big-bang investments in AI — that kept the entire world on edge.
At this juncture, we take stock of how the US economy and markets performed in the first year of Trump 2.0 and look at how US equities are placed for the rest of his tenure.
Economy
GDP
Under Trump, the US economy got off to a rocky start with real GDP contracting by 0.6 per cent in Q1-2025. This is the first time the economy had contracted since declining 1 per cent in Q1-2022. However, in Q2 and Q3, the economy grew 3.8 per cent and 4.3 per cent. These figures are quarter on quarter, seasonally-adjusted annualised growth rates.
In the US, personal consumption expenditure or PCE accounts for roughly 70 per cent of the GDP. Though PCE pulled its weight in Q2 and Q3, the real kicker came from a sharp decline in imports and good growth in exports, particularly services. Readers can recall that Trump’s reciprocal tariffs kicked in from April 2025.
Trade balance
While discussing tariffs, let us also address balance of payments (difference between exports and imports). Data is available for 2025 up to October. Trade deficit (goods and services) between January and October widened by $56 billion year on year or about 8 per cent. In the same period in 2024, trade deficit grew about 13 per cent. This is probably because the US didn’t import as much after reciprocal tariffs came into effect, while exports continued to grow (6.3 per cent).
Focusing just on goods, between January and October, imports grew 6.7 per cent year on year and trade balance widened 8 per cent. As can be seen from the chart, imports were front-loaded during January-March and barely grew/ declined in the months after. Based on 2024 data, the European Union (19 per cent), Mexico (16 per cent), China (13 per cent) and Canada (13 per cent) made up 61 per cent of total import of goods and are the top exporters to the US. Imports from China were hit the most with a 26 per cent decline. Imports from the EU and Mexico grew 7 per cent and 6 per cent, while those from Canada declined 5 per cent.
PMI
Domestic manufacturing wasn’t robust either, going by the ISM PMI (Institute of Supply Management’s Purchasing Managers’ Index). Barring January and February, the index never crossed the 50-mark (see chart).
A reading of over 50 indicates an expansion and vice-versa. This is a hit rate of 17 per cent (two out of 12 months) versus 86 per cent in Trump 1.0 (2020 has been excluded due to Covid).
Inflation
Now, onto whether tariffed imports caused higher inflation. Here, we are going with the PCE index, which the Federal Reserve (Fed) targets to keep under 2 per cent. Prices had risen 2.7 per cent in December 2024. Since then, the index marked a low of 2.3 per cent in April 2025. In the months that followed, the index has been steadily up, marking a rise of 2.8 per cent in September. This is the latest reading on the index.
However, going with CPI, that index, too, marked a low of 2.3 per cent (in recent times) in April. Prices steadily rose in the months after, to 3 per cent in September, but have since cooled to 2.7 per cent in November and December. These could probably be the months when the Americans consumed imported goods that were tariffed at negotiated lower rates, considering shipping time. It doesn’t appear that tariffs have caused prices to shoot up dramatically. It remains to be seen whether the PCE index, too, will replicate this trajectory and sustain below 2 per cent.
Jobs
The year 2025 has been a tough one for job-seeking Americans, with ‘Big Tech’ and other corporate layoffs. Unemployment rate, at 4.1 per cent in December 2024, crept upward to 4.5 per cent in November 2025 – such a rate was last recorded only in October 2021. It improved marginally in December to 4.4 per cent.
Going with non-farm payroll additions, 49,000 jobs per month, on an average, were added in 2025, compared with a mean of 141,000 in the eight years between 2017 and 2024 (Trump 1.0 + Joe Biden’s term). This period is considered as it nullifies the job losses during the pandemic and the hiring spree that followed. June, August, October even saw a month-on-month decline in payroll. This is a phenomenon last observed only in December 2020.
Macros in short: Consumption has done okay, although it needs to be noted that this is driven by a K-shaped economy. Imports have declined, jobs are in poor state and prices are uncertain to decline sustainably.
Markets
S&P 500 in the first year of Presidents
Before we move on to markets, here’s a fun stat. We compared how S&P 500 performed in the first year of Presidents — over 50 years, in the last 14 terms, starting from when Gerald Ford took over after Richard Nixon resigned (see Table 1). Trump 2.0 (2025) falls in the bottom half at the eighth position, with 2017 under Trump 1.0 the third best. With the mean of the sample at 11 per cent, 2025 is still above average.
How asset classes fared
US equities have given good returns. S&P 500, Dow Jones and the Nasdaq Composite have delivered 16 per cent, 14 per cent and 20 per cent, since January 20, 2025 (inauguration day) till date.
While S&P 500 returned 16 per cent, its EPS grew just 12.5 per cent. Sector-wise performance of S&P 500 constituents has been given in Table 3. All sectors posted earnings growth, except for energy, while heavy-weight IT’s profit grew 26 per cent.
The market cap of the Mag7 stocks expanded 20 per cent in aggregate, with their earnings growing 26 per cent (comparing 2024 earnings with estimated earnings for 2025, which is the sum of actual earnings up to Q3 2025 and consensus estimates for Q4 2025). Stocks excluding the Mag7 (S&P 493) have delivered 14 per cent returns for a 11 per cent rise in earnings.
Within the Mag7, except Alphabet and Nvidia, the rest delivered modest returns between 1 per cent and 9 per cent. Alphabet and Nvidia returned 65 per cent and 34 per cent.
Globally, equity indices have fared better than their US counterparts. Korean KOSPI and the Japanese Nikkei 225 indices stand out with returns of 92 per cent and 40 per cent, while Hong Kong-based Hang Seng rose 37 per cent. Indices in Europe — DAX, FTSE 100 and Euro Stoxx 50 delivered between 17 per cent and 20 per cent.
This trend can also be observed in how currencies have moved in the comparable period. The dollar index (DXY) recorded one of its worst years in history (9th worst), falling 9.3 per cent. The Euro, GBP and Yuan gained 13 per cent, 10 per cent and 5 per cent respectively, while DXY fell 9 per cent. Tariffs-caused volatility, a falling dollar against the backdrop of a 20+ per cent correction in crude prices partly meant indices in Europe and China fared better. The falling dollar is also one reason why gold and silver gave stellar returns ($ terms) of 70 per cent and 197 per cent.
On to the debt market now. Debt ETFs gave good returns. BlackRock’s iShares ETFs are presented in the table as representatives. Trump came to power when bond yields had spiked from the lows of September 2024, after the Fed started cutting rates, on fears that the rate cuts were premature. Through 2025, although yields have cooled, they have remained high and stubbornly above 4 per cent. What is noteworthy is that yields at the longer end of the curve have held up more (see chart). This could well be because of the lack of clarity as to whether inflation can be tamed and sustained under the Fed’s target range.
AI bubble?
If anyone was as excited about striking ‘deals’ after Trump, it should be the ‘tech bros’ of Silicon Valley, with their big-bang AI deals, often among themselves. The $500-billion Stargate project where OpenAI and Oracle are parties, Nvidia’s planned $100-billion investment in Open AI and the US government’s purchase of a 10-per cent stake in Intel for over $10 billion come to mind. The year also saw AI start-ups such as Anthropic, Perplexity and OpenAI raise millions of dollars at exorbitant valuations.
With the economic use-cases for AI still only evolving, it appears as if the line between optimism and delusion have blurred on Wall Street. Alphabet, Microsoft, Amazon, Oracle and Meta are estimated to invest about $1.1 trillion in capex over 2025 and 2026. Applying a fixed asset turnover ratio of 2x implies an expected incremental revenue of $2.2 trillion which is 1.3x the current revenue of these five giants ($1.6 trillion) – such a revenue growth is highly unlikely
To be fair, market did get jittery about AI stocks late in the year. However, even after steep corrections, stocks such as Oracle have still given good returns over the year and are yet valued at a premium to their five-year mean earnings multiples (see Table 4). For some, current valuations are baking in very high earnings growth expectations, anywhere between 50-130 per cent, over the next 12 months.
For Mag7 stocks such as Alphabet and Meta, the cash cow of ad revenue has to fire to support capital investments in AI – and such revenue is tied to sustainability of strong consumption, especially on a high base.
The combined market cap of top AI stocks is now over 42 per cent of S&P 500’s full market cap, and the combined earnings are over 30 per cent of the combined earnings of all S&P 500 stocks.
Clearly, a lot is riding on the AI wave. In 2026, either AI clicks or the stocks fold.
Outlook for 2026
The past year has been a strange one where all asset classes performed well — equities, real assets and debt. Such scenarios don’t last long, and the near future could prove investors in one or more asset classes wrong. For now, that asset class could be US equities.
The S&P 500 trades at a P/E ratio of 28x, building in an estimated earnings growth of 16 per cent over the next 12 months. As can be seen from the chart, the index is now trading at valuations above sub-prime peak levels and at similar multiples as the dotcom bubble. While robust AI-led earnings growth is not a given at this stage, rerating in equities can be even challenging – with yields at the longer end not giving in.
While the bullish views on the AI trade and consequently the US markets is now well known, it would be worth taking note of an interesting point brought out by long-term fund manager Dr John Hussman. He was prescient in his bearish calls, just ahead of the peak of the dotcom bubble and the 2007 housing bubble. While his bearish views over the last few years have not played out, he makes an interesting point for investors to ponder.
He points out that corporate profits (surplus) have reached record levels and this has been made possible by the deficit/ debt of the other two sectors – namely, households and government. While household and government debt has grown to exorbitant levels, equities’ valuations are still factoring in record surpluses of corporates to sustain, ignoring events such as credit defaults. If such events unfold, equity bulls could be caught napping. Recent tremors in the US private credit market must not be ignored. In other words, sustained good returns in US equities would require continued increase in government deficit.
His view: Even taking the sectoral deficit/surplus structure as durable, I expect we’ll see market losses, both in the S&P 500 and in the technology sector, on the order of -50 per cent to -70 per cent over the completion of this cycle.
While Trump takes pride in record stock market levels, the real test will be in 2026, as brewing affordability crisis undermines macro-economic numbers, cracks emerge on the AI trade, tariff impacts deepen, showdown with the Fed heats up and geopolitics is at its toughest in decades. All this must be offset by an AI miracle to justify the current S&P 500 valuation.
Published on January 17, 2026
