By Douglas Porter

October 10, 2025

Perhaps it was gold breaking the $4000 barrier, or maybe it was the series of record equity market highs even in the teeth of a normally tough season for stocks. It could be the fact that analysts have little economic data to chew on, and Q3 earnings season is just about to gear up. Whatever the cause, the persistent, steady, and forceful rally in pretty much everything over the past six months finally hit the collective consciousness this week. And many were making a direct comparison to the tech boom-cum-bubble in the late 1990s, which of course spectacularly crumpled in the early 2000s. Suddenly everyone from the IMF to the WTO to the head of some U.S. banks were warning of a repeat performance and the damage that could cause the economy. But then China’s late-week clampdown on rare earth exports and President Trump’s return fire of new tariff threats and canceling a proposed meeting with Xi threw a blanket on the rally, sending stocks, the dollar and yields skidding.

But before we start fretting about the possible hit to the economy that a possible serious drawdown in equities could inflict, let’s focus on the implications of the current state of market affairs. Even with the Friday stumble, the S&P 500 is still up 15% from a year ago and about 83% from three years ago. Adjusting for inflation, that’s a stunning comeback (Chart 1). And, even if one does accept the contention that we have been in an unsustainable rise, the long history of bubbles and manias shows that they can go on a lot longer and go a lot higher than anyone can imagine—that’s what makes them bubbles, after all. Just as a reminder, then-Fed Chair Alan Greenspan’s (in)famous irrational exuberance comment landed in December 1996, more than three years before tech stocks would crest in March 2000. And as many have noted, valuations are not nearly as stretched as in the 1990s, and the major movers are mostly highly profitable companies with robust business models.

From an economic standpoint, the current tech boom has significant effects both directly—through the strength in business investment in anything remotely related to AI—and indirectly—through the wealth effect of thriving equity markets. While economists have spent much of 2025 gaming out different impacts from the tariff flurry and the OBBBA, the tech boom has been quietly running the show in the background. And this may help explain the seeming dichotomy between a clearly softening U.S. employment picture (albeit less clear in the past month with the government shutdown) and the resiliency of overall GDP. The last we heard from the Atlanta Fed’s GDP Nowcast model was for an estimate of 3.8% annualized growth in Q3, matching the rebound in Q2 to the decimal point. We have pencilled in 2.8%, but the point is that even with all of the intense policy uncertainty of the past year and a marked slowdown in hiring, the U.S. economy has managed to grind out 2% y/y GDP growth, right in line with its 20-year average.

If the economy can stay on track through the many dramas of the past year with average growth, imagine what may lie ahead with less policy uncertainty, a Fed in easing mode and the massive tailwind of buoyant financial markets. This thought process appears to be making an impact on the consensus. The latest Blue Chip Survey, conducted just this week, finds that the average GDP growth call for next year has risen by 3 ticks to 1.8% (moving exactly in line with our call) after an expected 1.9% average advance this year. The 2026 consensus has been slowly grinding higher since being battered by Liberation Day in April, but the big step up this month is quite notable. Barring a geopolitical shock or a nasty turn in the trade war, it seems that the risks to next year’s growth call are to the high side, and it has been a long while since we have been able to confidently say that.

So where does that leave the Fed? Even without the guidance of official data, and a few cautionary notes by some Fed speakers and the FOMC Minutes this week, markets continue to almost fully price in a 25 bp cut in the October meeting and are leaning heavily to a repeat in December. Where things seem to be shifting a bit is on what happens then in 2026, with the market slightly dialing back expectations for cuts next year. At this point, pricing is a bit lighter than our call of another 75 bps of cuts in 2026, with the overnight rate seen bottoming out around 3%. Of course, a significant wildcard on the Fed call for next year will be the makeup of the FOMC, and the fact that a new Chair will be in place by May. The flashpoint for markets next year may be the possibility of a dovish Fed running up against an economy that is powered by an ongoing tech boom.

Canada has been riding the tech (and gold) boom higher as well. Not unlike the U.S., the economy has held up a bit better than widely expected, especially compared with the dark days in early spring. The September jobs report saw a nice rebound from a weak summer, snapping back by 60,400. But looking beyond the big swings in the headline results, the steadier unemployment rate held fast last month and is up by half a point in the past year to 7.1% (in Sahm Rule land)—probably the most accurate way to view the economy over the many twists and turns.

While Canada has certainly not seen the business investment boom tied to the AI backbone, it has been supported by the wealth effect of rollicking equity markets. Even with the step back this week, the TSX is still up 23% y/y. And, of course, Canada’s wealth effect can’t be gauged simply by looking at the domestic market, since Canadian investors are also heavily tied into U.S. markets. In just the two years to mid-2025, for example, Canadians poured more than $100 billion into foreign equities, even as foreign investors shed more than $60 billion of Canadian stocks. (Seems like Buy Canada only applies to goods and services.)

The absence of an AI-related capital spending spree in Canada may be starting to shift. Between Ottawa’s heavy focus on the sector and now some U.S. companies eyeing Canada’s still relatively cheap and abundant supply of electricity, investment flows may begin to gather some momentum. Then all that would be required to become more upbeat on Canada’s 2026 growth prospects would be a bit more clarity on the still-cloudy trade front. Even with many tantalizing hints of possible sectoral deals in the wake of PM Carney’s trip to Washington this week, the reality is that nothing has changed yet—and, if anything, the concerns on the auto side are as real as ever.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.