Capital Economics expects the S&P 500 to decline to 6,500 by the end of 2027, down approximately 21% from its forecast of 8,250 for the end of 2026, as the firm assesses the potential consequences of a reversal in artificial intelligence-related stock valuations.
Chief economic adviser John Higgins said in a note this week that he believes the AI investment cycle is approaching the later stages of a bubble, with US equities likely to experience the largest impact if valuations reverse.
Higgins estimates that the eventual decline in the S&P 500 from its peak to its trough could reach at least 30%, exceeding the difference between the firm’s two year-end forecasts.
He pointed to historical market performance, noting that declines of 30% or more have occurred seven times over the past century. The collapse of the dot-com bubble provides the closest comparison in his assessment.
Although Capital Economics expects a downturn in US equities to spread to other stock markets, the firm anticipates a smaller impact internationally, reflecting the generally lower weighting of technology companies in markets outside the United States.
The implications for government bonds could also differ from those observed following the dot-com collapse.
Capital Economics expects developed-market 10-year sovereign bond yields to decline modestly by the end of 2027 but does not anticipate a Treasury rally comparable to the one that followed the earlier technology downturn. The firm attributes this difference to more limited potential for a reduction in term premia.
In corporate credit markets, Higgins expects US bonds to face some pressure because credit spreads are currently very low. Nevertheless, he forecasts a smaller impact than during the dot-com collapse.
The US dollar is another market that Capital Economics expects to be affected. Higgins considers the currency more overvalued than it was during the dot-com period and anticipates that it will weaken if the AI bubble bursts.
The firm’s outlook therefore combines a potential substantial decline in US equities with more moderate movements in sovereign bonds, some pressure on corporate credit and depreciation of the dollar. These remain forecasts based on its assessment of AI-related market risks.
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