The risk of adiabatic shear instability is common in traditional alloys covering high-strength steels, copper alloys and aluminum alloys during high strain rate deformation. However, the research on shear instability of 2195 Al-Li alloy prepared by powder metallurgy (PM) at high strain rates is still blank. The purpose is to explore its microstructure evolution and dynamic compression behavior. In this work, the 2195 Al-Li alloy prepared by PM amazingly demonstrates excellent resistance to shear instability at high strain rates during Split-Hopkinson pressure bar (SHPB) experiment. The microstructural evolution of grains and T1 (Al2CuLi) precipitate phase, and dynamic compression behavior of PM 2195 Al-Li alloy at various strain rates from 3000 s−1 to 9000 s−1 are investigated in detail employing correlative electron-backscatter diffraction (EBSD) and transmission electron microscopy (TEM). During high strain rate deformation, the alloy undergoes grain fragmentation and rotation, increasing dislocation density around the grains. When the strain rate is from 3000 s−1 to 7500 s−1, the Kernel Average Misorientation (KAM) value increases, indicating intensified localized strain. At a strain rate of 9000 s−1, a small number of grains are surrounded by nanocrystals (around 200 nm) that undergo stress release, while the average size of micrometer-sized grains is 0.81 μm. As the strain rate increases, the T1 phases in the alloy extends, vibrates, and fractures before dissolving in the matrix, while high-rate deformation promotes dislocation entanglement and defects, leading to the decomposition or ordering of precipitated phases through rapid plastic deformation. By virtue of energy dissipation strategy via the formation of nanocrystallines and dislocation behavior induced by the dissolution of T1 phases, the "positive-positive" effect is observed. The PM 2195 Al-Li alloy undergoes no shear failure even at the strain rate of 9000 s−1, showing great prospects in future applications in dynamic-loading conditions.