Market Shrugs Off Macroeconomic, Geopolitical Woes in Pursuit of AI Dreams

Share: Print

Global markets have been roiled in recent years by a series of shocks: a global pandemic, regional wars, political leadership changes, recession fears, interest rate hikes, and, most recently, trade wars sparked by tariff noise.

Every quarter seems to bring new challenges, yet the markets find ways to adapt and move forward.

That pattern played out in the global market for IT and business services during the second quarter. Despite macroeconomic and geopolitical woes, the market remained resilient, thanks in large measure to AI. Enterprises and hyperscalers are intent on staying ahead of the competition when it comes to AI, and they are betting big on the cloud infrastructure needed to realize their AI ambitions.

During the 2Q25 Global ISG Index™ webcast this week, we reported another high for the cloud-based as-a-service (XaaS) market. Annual contract value (ACV) for cloud services reached nearly $19 billion in Q2, up 28 percent versus the prior year. It was its fourth straight quarter of double-digit, year-on-year growth.

Cloud infrastructure provided by the likes of AWS, Azure and Google Cloud offers the computing power and scalability to someday make everyone’s AI dreams a reality. The Big Three hyperscalers are aggressively expanding their data center capacity to meet the anticipated surge in demand in the coming years. The strength of that demand was evident in Q2, as spending on infrastructure-as-a-service (IaaS) climbed 34 percent year over year, while software-as-service (SaaS)—sporting new AI-enabled capabilities—rose 9 percent.

Meanwhile, the managed services sector was up 2.3 percent in Q2, to $10.6 billion. It was the eleventh straight quarter the global managed service market has exceeded ACV of $10 billion, with the market growing year over year in 18 of the last 20 quarters. Enterprises continue to turn to managed services to optimize their costs, and AI will play a bigger role going forward in making such services more efficient and less expensive.

Put the two together—cloud services and managed services—and the combined market was up 17 percent, to a record $29.2 billion. This represents the seventh consecutive quarter of sequential growth for the combined global market.

The first half was equally impressive. The combined market rose 18 percent, to $58.3 billion, as the XaaS market climbed 29 percent, to $37.1 billion, and managed services advanced 2.8 percent, to $21.2 billion.

Economic and geopolitical uncertainty is still high, and enterprise buyers remain cautious, especially when it comes to discretionary spending. They are willing to invest in AI, for competitive and cost reasons, but are less eager to spend heavily in other areas. Even one of the hottest areas of tech services spending, application development and maintenance (ADM), took a pause in Q2 from its usual double-digit growth.

During the second quarter, we saw signs that the market may be slowing a bit, with buyers waiting for the next green light (perhaps in the form of interest rate cuts?) before committing more money and moving ahead aggressively.

Sequential growth in cloud spending slowed from the first quarter, up only 1 percent quarter over quarter. IaaS was up only 3 percent, while SaaS was down 4 percent, sequentially. Managed services spending was flat versus Q1.

It’s with this in mind that we are maintaining our full-year growth forecast for managed services at 1.3 percent, reflecting both a stabilizing tariff environment but also continued weakness in discretionary spending.

On the cloud side, we’ve raised our XaaS forecast 300 basis points to 21 percent, based on the strong demand for AI-related transformation. 

To get a fuller picture of current market dynamics, view the 2Q25 Global ISG Index™ webcast replay, presentation slides and press release on our website.

While you’re there, we invite you to sign up for our weekly ISG Index Insider briefing and register for our third-quarter 2025 ISG Index call, set for October 9. 

Share:

About the author

Steve Hall

Steve Hall

Steve is President, ISG EMEA, providing strategic insight and advice to help ISG clients in the region solve their most critical business challenges and adopt and optimize the technology and operating models they need to compete successfully.

Steve was named Chief AI Officer in 2024. He leads the firm’s work to help clients create an AI strategy, establish a business case for investment and select the right business partners. His industry-leading expertise in navigating the complexities of adopting technology at scale is helping clients drive value into every aspect of their operations.

Steve joined ISG in 2005 and has led ISG Digital Advisory Services, Emerging Technology Services, Global Product Engineering and Application Development & Maintenance. He is trained as a software engineer and holds a bachelor’s degree in computer science from Regis University.