- According to Capital Economics, the AI-powered stock market bubble will burst in 2026.
- The research firm said rising interest rates and rising inflation will weigh on stock valuations.
- “We think the bubble will eventually burst after the end of next year, causing a correction in valuations.”
According to Capital Economics, the stock market bubble powered by artificial intelligence will burst in 2026.
The research firm predicts that a stock market bubble caused by investor excitement about artificial intelligence will push the S&P 500 index to 6,500 by 2025, led by technology stocks.
But from 2026 onwards, these stock market gains will quickly unwind as rising interest rates and inflation start to weigh on stock valuations.
“Ultimately, we expect equity returns to be lower over the next 10 years than they have been over the past 10 years,” said Capital Economics’ Diana Iovanel and James. I think this may be the end of performance.” Riley said.
Their bearish view of the stock market is somewhat counterintuitive, as economists expect greater adoption of AI to trigger a boost in economic growth through improved productivity. This stimulus should lead to a higher-than-expected rise in inflation and a corresponding rise in interest rates.
Rising interest rates and inflation are ultimately bad news for stocks, as evidenced by the recent sell-off triggered by March’s shockingly high CPI inflation report.
“Ultimately, we think the bubble will burst after the end of next year, causing a correction in valuations. Ultimately, this dynamic is similar to the dot-com bubble of the late 1990s and early 2000s and the 1929 “The world crash revolved around both,” Iobanel and Reilly said.
The expected bursting of the stock market bubble should result in favorable investment returns for bonds over stocks for the next 10 years.
Capital Economics said of the bond market, “As Treasury yields settle to higher levels, higher returns are expected.”
Capital Economics projects that U.S. stocks will return an average of just 4.3% annually between now and the end of 2033, well below the long-term average return of about 7% after inflation. Meanwhile, Capital Economics said it expects U.S. Treasuries to return 4.5% over the same period, slightly outpacing equity returns.
These expected returns are in stark contrast to the average annual return of 13.1% that U.S. stocks have delivered over the past decade.
“American exceptionalism may end in the coming years,” Iovanell and Riley said.
But analysts say there is one big risk to their outlook. That’s because it’s inherently difficult to accurately time the peak of a stock market bubble and how long the bubble will unwind.
“When and how the AI-powered stock bubble bursts is a key risk to our forecasts. In particular, one downside risk is that the bubble bursts, as was the case after the dot-com bubble. “The aftermath of the outbreak lasts for more than a year,” Iovanel and Reilly said.
