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According to Capital Economics, the AI-fueled stock market bubble will burst in 2026.
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The research firm said rising interest rates and higher inflation will weigh on stock valuations.
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“We suspect that the bubble will eventually burst after the end of next year, which will cause a correction in valuations.”
According to Capital Economics, the stock market bubble fueled by artificial intelligence will burst in 2026.
The research firm has predicted that a stock market bubble fueled by investor enthusiasm for artificial intelligence could push the S&P 500 to as high as 6,500 by 2025, with technology stocks leading the way.
But starting in 2026, those stock market gains are likely to rapidly decline as higher interest rates and high inflation begin to weigh on stock valuations.
“Ultimately, we expect equity returns over the next decade to be worse than the last, and we think the long-term outperformance of the US equity market may be coming to an end,” said Diana Iovanel and James Reilly of Capital Economics.
Their bearish stock market call is somewhat counterintuitive, as economists expect that the growing adoption of AI will lead to a boost in economic growth, driven by productivity gains. That economic boost should result in higher inflation than most expect and, in combination, higher interest rates.
Higher interest rates and inflation are ultimately bad news for stock prices, as evidenced by the recent stock market decline, which was triggered by a surprisingly high March CPI inflation report.
“We suspect that the bubble will eventually burst after the end of next year, causing a correction in valuations. After all, this dynamic played out around both the dotcom bubble of the late 1990s and early 2000s and the Great Crash of 1929,” Iovanel and Reilly wrote.
The expected bursting of the stock market bubble should lead to a decade of bond-favored investment returns over stocks.
“We expect higher returns as government bond yields move to higher levels,” Capital Economics said of the fixed income market.
Capital Economics predicts that U.S. stocks will deliver an average annual return of just 4.3% 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 stock gains.
These expected returns are in stark contrast to the 13.1% average annual returns that U.S. stocks have delivered over the past decade.
“American exceptionalism may come to an end in the coming years,” Iovanel and Reilly said.
But there is one major risk to their outlook, the analysts said, and that is the inherent difficulty in accurately timing the peak of a stock market bubble and how long it takes for the bubble to cool.
“When and how the AI-fueled equity bubble bursts is a key risk to our forecast. A specific downside risk is that the aftermath of the bubble bursting lasts longer than a year, as was the case after the dotcom bubble,” Iovanel and Reilly wrote.
This story was originally published in April 2024.
Read the original article on Business Insider
