Trump Says We Have the “Hottest” Economy. Markets Tell a Different Story.
The U.S. economy entered 2025 as the “envy of the world.” It exited well behind its peers.
MANY OF US HAVE BEEN raising hue and cry about the irreversible damage Donald Trump has wreaked on the economy. Tariffs! Corporate shakedowns! Destruction of research institutions! Deletion of data! Politicization of the Federal Reserve! Alienation of our allies! Socialization of private companies!
And of course, the collapse of the rule of law.
All of these things should be terrible for the U.S. economy, especially in the long term. And yet to date, the stock market has seemingly shrugged it all off.
In fact, markets look somewhat ebullient. In 2025, the S&P 500 grew a solid 16 percent—far better than the average year, and better than many forecasts, particularly in the wake of Trump’s Liberation Day tariffs.
So what’s going on? Why aren’t investors pricing in all these risks?
Some of it may be that they believe there’s a huge, sustainable Trump boom just around the corner. It didn’t come by the end of 2025, but perhaps it’ll arrive this quarter . . . or next quarter . . . or the end of 2026, per the latest goalpost-moving forecasts from Commerce Secretary Howard Lutnick.
But there are other ways to interpret what’s going on. None of them are particularly assuring:
U.S. markets actually aren’t doing that great, when compared to our global competitors.
The lion’s share of growth here in the United States—in both financial markets and hard economic data—is driven by a single sector: A.I . . .
. . . which looks an awful lot like a bubble right now.
I find these explanations to be more persuasive than the hope that a new economic golden age is about to dawn. And to understand why, it’s worth recapping why you should worry about the long-term damage from Trump’s policies in the first place.
LET’S START WITH something that should go without saying: Democracy and the rule of law are good for their own sake. But they also matter quite a bit to the U.S. economy.
A country that protects property rights; that has free capital markets; that has a stable and predictable regulatory regime; where all citizens are equal before the law; where individuals don’t fear being expropriated by the state without cause; and where private contracts can be enforced regardless of political connections is generally a better place to do business. All these features are among the reasons the United States has long been the richest country on earth. It’s also why we have attracted so much foreign capital.
When property rights aren’t protected and the justice system operates to reward friends and punish enemies, doing business is harder. People don’t have the certainty they need to invest here, or study here, or start businesses here.
“If businesses can’t predict what the law will be next year or even next month they will pause,” Nick Bloom, an economics professor at Stanford, told me. “No firm wants to invest to suddenly discover the government is now taxing you twice as much or has banned your product.”
In fact, there was a Nobel Memorial Economics Prize awarded in 2024 on “how institutions are formed and affect prosperity.” Here’s how the Nobel committee, in press materials released with the award, summarized the laureates’ findings: “Institutions that were created to exploit the masses are bad for long-run growth, while ones that establish fundamental economic freedoms and the rule of law are good for it.”
Much of that prize-winning research looks at developing countries. But lately we have plenty of cautionary tales here in the United States.
Today, companies must fritter away precious resources finding ways to bribe appease a mercurial president, via gilded trophies, fake accolades and unpopular movie sequels. Or they waste their energy scheduling and canceling and then uncanceling shipments of imported goods, depending on Trump’s latest tariff tweets. Or maybe they’re holding off on investment entirely, because there’s too much uncertainty.
This affects even the sectors Trump is ostensibly trying to help, such as energy.
“With all the changing regulations a bunch of wind-farm investments are massively lossmaking and all investment has stopped,” Bloom said. “This will not only damage wind farms, but other energy investments as related industries fear being next. If you are thinking of building a big coal station, sure the Trump administration is in your corner today. But maybe next month Trump decides he prefers oil or gas, or the next administration thinks you should be taxed twice as much. So not surprisingly even coal plants are not rushing to invest.”
THE HARD ECONOMIC DATA are somewhat dated and backward-looking, especially right now due to the recent government shutdown. What data we do have are not super encouraging, given that three of the past six months saw job losses. But we do have real-time data from stock markets, which are supposed to be forward-looking.
The White House has been quite eager to tout that data because U.S. markets appear to be up—a fair bit. Aides often crow about new market highs. And Trump often claims that the United States is “the hottest country anywhere in the world,” and that all foreign leaders admit it.
But the numbers appear less impressive when you look a little closer. In reality, U.S. markets have been relatively laggard since Trump took office, when compared to the rest of the world.
As you can see, non-U.S. markets grew by nearly twice as much as U.S. markets did last year, in data from the financial services company MSCI.
By other metrics, too, the United States has been losing its premium against other countries. The dollar is slumping against other currencies, and in 2025 had its biggest decline since 2017 (the first year of Trump’s prior term). As Bloomberg’s Robert Burgess pointed out, every major currency appreciated against the U.S. dollar in 2025.
The American economy may have entered 2025 as the “envy of the world,” according to The Economist, but it exited somewhat worse for wear.
Then there’s the question of what drove growth here in the United States. The answer is, overwhelmingly, artificial intelligence.
When it comes to the “real” economy, we have data through only the first nine months of 2025. During that time, investment in AI-related categories (such as data center structure investment or software) accounted for about a third of overall real GDP growth.1
When it comes to stock markets—which take us through the end of 2025—the numbers are even more lopsided. A handful of mega-cap, AI-intensive tech stocks known as the “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) currently dominate the market. This is visible in multiple metrics, including capitalization and R&D.
Mag 7 stocks also rose about 26 percent in 2025, with chipmaker Nvidia alone rising nearly 40 percent. Collectively these seven stocks alone accounted for nearly half of all market returns last year.
In other words, the AI boom seems to be propping up much of the rest of the economy.
“The general consensus among economists and folks I speak to is that the AI boom has offset the uncertainty and tariff damage,” Bloom says. “It’s like unexpectedly inheriting $100,000 in the same week as you get hit by a surprise $100,000 tax bill—they are both big shocks but end up canceling out.”
Ironically, one reason the AI sector has experienced this growth is that it has been relatively insulated from some of Trump’s destructive behavior, since he has carved out huge tariff exemptions for AI-related imports. To much controversy, he has also allowed Nvidia to sell its powerful H200 chips to China.
Finally there’s the question of how sustainable all this AI investment is.
It is true that AI is expected to restructure much of the economy, including the white-collar labor market. So it makes sense that companies are spending a lot of money investing in AI. But there seems to be a lot of bad money chasing after good. Many investors are betting that AI will be a winner-take-all market; if that’s the case, you might see one champion emerge and suddenly everyone else pulls their funding simultaneously, leading to a collapse of those other companies and the popping of the industry bubble.
When and if that happens, we may have some pain to reckon with.
In historical terms, stocks look pretty frothy right now. One measure that suggests this is the “cyclically-adjusted price-earnings” ratio, maintained by Yale economist and Nobel laureate Robert Shiller. The “CAPE” compares the past decade of corporate earnings to current stock market prices. When the ratio is high, it’s often a sign that stocks are overvalued. Right now it’s over 39, the highest level it’s been since the dotcom bubble.2
As for all the longer-term damage Trump has wreaked across the rest of the economy, it may also be the case that investors know there are problems but are waiting for someone else to end the party first. This is generally how bubbles work: people continue blowing them bigger while there’s still money to be made, even if everyone knows the pop may be coming someday. Former Treasury Secretary Bob Rubin has likened the current situation to October 1987: For years before the “Black Monday” crash, market conditions were considered to be “highly in excess and nothing happened in the markets.”
As a result, Rubin said, “people stopped listening.” Until one day, with no obvious, specific triggering event, markets just imploded.
I also asked Simon Johnson, one of the recipients of that 2024 Nobel for research on democratic institutions and prosperity, why the business community still seems relatively unperturbed by the degradation of rule of law here. He offered a more ominous analogue.
“Our findings are for long-term growth; plenty of authoritarians oversee growth spurts (e.g., from commodities) and then it collapses,” he replied. “When the tide is rising, even leaky boats rise. When the tide goes out . . . see Suharto’s Indonesia 1997–98.”
Ramparts
— The New Year began with a delicious serving of TACOs: In 2026, Trump has already chickened out of his tariffs on pasta and furniture.
— It’s probably not a good sign that Trump’s assistant attorney general for civil rights used a slur for people with disabilities. Alas, this is not the only indicator that this administration scorns those with special needs.
— Trump’s cabinet is hiding from Congress, which says as much about the administration as it does Congress. For example, would Republican lawmakers not like to hear what OMB Director Russ Vought has to say, given that he has stolen their constitutionally granted power of the purse? I know I would.
Healthcare spending also drove an unusually large share of economic growth in the third quarter.
In a recent market forecast, Shiller also warned that the mere existence of a nickname for the seven AI-driven stocks was a red flag. “History offers a cautionary tale: past technology booms produced only a handful of long-term winners,” he wrote. “Anytime a group of stocks gets a name or becomes a meme, this is a sign of, at least temporarily, a strong narrative, as in the late 1990s and today.” Michael Burry, the central figure in The Big Short, has issued similar warnings.
It was my experience, when trading commercial paper in the late 1980s, that traders keep trading until the bubble bursts, betting on being the very last person to make money before the whole thing goes to sh*t. As we all know, the health of the financial markets isn't a good indication of the health of the national (or world) economy. It's not this time either. The AI bubble will burst and it's gonna hurt. But those who caused it won't suffer. I do wish I lived in a world where there would be consequences for such callous actions. But that won't happen as long as the US leads the world order and more import is put on the "health" of the stock market than the health of citizens.
Ms. Rampell,
Thank you for the explanation and the data. It's very informative.