AI Stock Surge Approaching a Turning Point, Capital Economics Says
Capital Economics’ latest analysis signals that the AI-driven rally in equities might be reaching its final stage. While the S&P 500 is expected to remain supported by strong AI-related earnings through the rest of this year, potentially climbing to 8250 points by year-end, the research warns that underlying valuation disconnects from fundamentals could trigger a correction by late 2027, bringing the index down to around 6500.
The report states, “The AI-fueled rebound appears close to peaking but has not concluded. Markets heavily weighted toward technology hubs in the US, South Korea, and Taiwan may continue to outperform this year. However, next year could see varied degrees of decline, leading us to set the S&P 500 year-end target at 8250 and a lower level of 6500 by the close of 2027.”
Valuations Near Dot-Com Bubble-Era Peaks
Since the emergence of the AI wave earlier this year, the S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE) has surged by over 12 points, now exceeding 40. This level closely approaches the highs seen before the 2000 internet bubble burst. Capital Economics highlights that the index’s gains over the past three years have largely been driven by expanding valuations rather than fundamental improvements.
Although forward P/E ratios show less immediate pressure, the long-term CAPE indicator reveals deeper valuation risks accumulating in the market.
Concentration Risk Intensifies in Tech Giants
The rally has been propelled mainly by a handful of large technology and semiconductor firms, amplifying concentration risk within the US equity market. The report also questions whether the rapid earnings growth underpinning AI stocks can be maintained over time.
Further caution is raised by rising capital expenditure relative to economic output in the tech sector and non-financial companies’ market values nearing historical peaks compared to their net assets—signs consistent with a late-cycle market environment where prices are increasingly detached from underlying business performance.
Investor Sentiment Vulnerable to Earnings and AI Spending
While an immediate market crash is not projected, Capital Economics warns that investor confidence could deteriorate quickly if corporate revenue growth falls short of expectations or if there is a reassessment of AI investment scales. Prior analyses have suggested that if the S&P 500 reaches 8000 points by the end of 2026, the probability of a correction exceeding 30% grows notably, though this would still be lower than the nearly 50% drop seen during the dot-com collapse.
The study also notes that significant foreign capital inflows into US equities, coupled with planned IPOs and secondary equity offerings by major tech firms, may increase supply pressure and heighten the risk of market adjustments.
Market Fragility Linked to Few AI Leaders
Currently, the market capitalization share of a small group of leading AI companies has surpassed the peak concentration levels seen during the late 1990s tech bubble. This concentration makes the overall market particularly sensitive to shifts in investor sentiment.
In sum, the research highlights growing risks of volatility tied to elevated AI stock valuations and increasing concentration, suggesting that market participants should remain alert to the possibility of a substantial correction in the coming years.