Analysts Predict AI-Driven Stock Market Bubble to Burst in 2026

Capital Economics has outlined a future scenario where the current enthusiasm for artificial intelligence (AI) will drive the S&P 500 to unprecedented heights, potentially reaching 6,500 by 2025.

by Faruk Imamovic
SHARE
Analysts Predict AI-Driven Stock Market Bubble to Burst in 2026
© Getty Images/Spencer Platt

Capital Economics has outlined a future scenario where the current enthusiasm for artificial intelligence (AI) will drive the S&P 500 to unprecedented heights, potentially reaching 6,500 by 2025. This surge, primarily fueled by tech stocks, represents a significant phase of investor optimism.

According to the research firm, this remarkable growth is largely driven by the perceived potential of AI to revolutionize various industries, leading to leaps in productivity and, consequently, economic growth. However, the story takes a turn starting in 2026.

Analysts Diana Iovanel and James Reilly of Capital Economics foresee a sharp reversal of these gains. They predict that escalating interest rates and an increase in inflation will start to negatively impact equity valuations.

This downturn is expected to mirror historical market corrections, such as those seen during the dot-com bubble and the Great Crash of 1929. "Ultimately, we anticipate that returns from equities over the next decade will be poorer than over the previous one.

The long-running outperformance of the US stock market may come to an end," the analysts commented.

A Shift in Investment Returns

This expected shift in the market is projected to alter investment strategies significantly.

With the anticipated burst of the AI-driven stock market bubble, the next decade could favor bonds over stocks. "We expect stronger returns as government bond yields settle at higher levels," stated Capital Economics, reflecting on the fixed-income market.

This outlook suggests a recalibration of investor expectations as U.S. Treasurys are forecasted to yield slightly better returns than stocks, with an annual return of 4.5% compared to stocks' 4.3%. Such a shift is starkly different from the robust annual returns of 13.1% delivered by U.S.

stocks over the past decade. The transition might mark the end of what some analysts call "American exceptionalism" in the stock market. Iovanel and Reilly's report does caution, however, that forecasting the precise timing of the market's peak and the duration of its subsequent decline remains a significant challenge.

"When and how the AI-fueled equity bubble bursts is a key risk to our forecast," they noted, underscoring the unpredictable nature of market bubbles and their aftermaths.

SHARE