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Pro: AI boom ending?

4 d ago

Capital Economics warns that while the S&P 500's rally may continue this year, its medium-term outlook is poor as multiple equity market bubble indicators suggest the AI-driven boom is nearing an end, according to senior market economist James Reilly. In a Thursday note, the firm—which has been bullish on stocks since mid-2023 due to AI's transformative potential—maintains its year-end 2026 S&P 500 forecast above consensus but cautions that the rally is a bubble that will eventually burst. Reilly tracks eight indicators including valuations, earnings, index concentration, equity issuance, and foreign interest in U.S. stocks. Several measures already approach levels seen at previous market peaks. Earnings stand out as the biggest warning sign: S&P 500 earnings growth expectations are near dot-com bubble extremes, and long-term EPS growth forecasts have hit a record high. The heavy concentration of this expected growth in tech means any weakness in tech earnings will weigh heavily on the index. Index concentration is around dot-com-era extremes, net equity issuance has turned positive, and foreign ownership of U.S. stocks is at a record high. Reilly notes that another wave of IPOs and share sales could be particularly significant, as similar issuance booms historically coincided with market peaks. "On past form, this suggests the end of the bubble is just months away, rather than years," he said. Leverage measures are not yet alarming but heading in a concerning direction, while volatility metrics look consistent with a mid-stage bubble. Capital Economics forecasts the S&P 500 will rally from around 7,650 now to 8,250 by end-2026, then fall to 6,500 by end-2027—implying 8% upside this year and a 21% slide in 2027.