The artificial intelligence frenzy driving today’s stock market could come to a screeching halt in 2026, according to a recent report from Capital Economics.
The London-based research firm predicts that the current AI-fueled bubble will burst, potentially erasing years of gains and ushering in a decade of underwhelming returns for equity investors.
The S&P 500 will peak at 6,500 in 2025 before a sharp reversal, as higher interest rates and elevated inflation weigh on equity valuations, the firm predicted. This comes amid growing concern that AI enthusiasm has pushed stock prices to unsustainable levels.
“We suspect that the bubble will ultimately burst beyond the end of next year, causing a correction in valuations,” explained Capital Economics analysts Diana Iovanel and James Reilly. They drew parallels to the dot-com bubble of the late 1990s and early 2000s, as well as the Great Crash of 1929.
Key predictions:
- S&P 500 to reach 6,500 by 2025
- AI-driven bubble to burst in 2026
- US stocks to return 4.3 percent annually through 2033
- US Treasuries to outperform stocks with 4.5 percent annual returns
The forecast presents a paradox: AI adoption is expected to boost economic growth through increased productivity, but this very success could lead to higher-than-expected inflation and interest rates, traditionally negative factors for stock valuations.
Capital Economics projects US equities will deliver average annual returns of just 4.3 percent until the end of 2033, significantly below the long-term average of about 7 percent after inflation. In contrast, they anticipate US Treasuries will return 4.5 percent annually, slightly outpacing stocks.
This outlook stands in stark contrast to the stellar performance of US stocks over the past decade, which saw average annual returns of 13.1 percent. “American exceptionalism may end in the coming years,” Iovanel and Reilly noted.
However, the analysts acknowledged the inherent difficulty in timing market peaks and troughs.
“When and how the AI-fueled equity bubble bursts is a key risk to our forecast,” they cautioned. “In particular, one downside risk is that the aftermath of the bubble bursting lasts longer than one year, as was the case following the dot-com bubble.”
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