Capital Economics says the U.S. stock market rally driven by enthusiasm around artificial intelligence is moving closer to its end, even though the S&P 500 may still have room to rise further this year.
In a note, the firm’s senior market economist James Reilly said a broad set of equity bubble indicators now points to a late-stage market cycle. “Most indicators suggest the AI equity boom is nearing an end,” he wrote.
Since mid-2023, Capital Economics has been more constructive on U.S. equities than many peers, reflecting its view that AI will be a transformative technology. At the same time, the firm has consistently argued that the rally has bubble-like features and will eventually unwind.
To assess whether markets are in a late-stage bubble, Reilly reviewed eight indicators, including valuations, earnings, index concentration, equity issuance and foreign demand for U.S. stocks. Some of those gauges are already at or near levels seen before previous market peaks.
The clearest warning sign, in his view, comes from earnings expectations. Forecasts for S&P 500 earnings growth are around levels last seen at the peak of the dot-com bubble, while long-term EPS growth expectations have climbed to a record high. Reilly said the fact that so much of that expected growth is concentrated in the technology sector means any signs of weaker earnings from tech firms could weigh heavily on the broader index.
Other indicators are also flashing caution. Index concentration is near dot-com-era extremes, net equity issuance has turned positive, and foreign ownership of U.S. stocks is at a record high. Reilly said another wave of IPOs and share sales would be especially notable, since similar issuance booms have historically coincided with market tops.
“On past form, this suggests that the end of the bubble is just months away, rather than years,” Reilly said. He added that leverage measures are not yet as alarming as other metrics, though they are moving in a “concerning direction.” Volatility indicators, meanwhile, look more consistent with a mid-stage bubble than with the most extreme final phase.
Even so, Capital Economics still expects the S&P 500 to rise from around 7,650 now to 8,250 by the end of 2026. Beyond that, however, the firm forecasts the index will fall back to 6,500 by the end of 2027. That scenario implies roughly 8% upside this year, followed by a 21% decline in 2027.
