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The stock market will inflate another 20% before the bubble bursts, says research firm

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  • Stocks will rise another 20% before the bubble deflates, Capital Economics predicted.

  • The research firm expects the S&P 500 to reach 6,500 points before a correction takes place.

  • That’s because stocks tend to rise quickly just before the end of a bubble, the company said.

Investors looking for signs of a bubble can expect the stock market to pump up another 20% before correcting, according to researchers at Capital Economics.

The research firm pointed to the latest surge in stock prices, with the S&P 500 and the Dow Jones Industrial Average recently setting new records and the major indexes heading for new all-time highs as the week kicked off on Monday.

But investors trying to push the bull market higher should know that the market can only make so much profit. According to John Higgins, chief market economist at Capital Economics, stocks look like they are in an advanced bubble, meaning stocks are in for a steep rally before the bubble eventually bursts.

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“There’s always the temptation to push the market a little higher, but I’m not convinced you should do that at this stage. The story we told a year or so ago seems to be coming true,” Higgins said in a recent podcast. “What’s that story? I think it’s actually very simple and there’s a stock market bubble,” he said, pointing to the excitement about big tech.

Wall Street’s enthusiasm for AI mirrors the hype surrounding Internet stocks in the 1990s, Higgins noted, which should bode well for the market. The Nasdaq Composite lost 77% from peak to trough in the early 2000s, while the overall market saw a $5 trillion value disappear in 2002.

It’s “impossible” to predict when the bubble will eventually burst, how deeply stocks will fall, or what will trigger the correction, Higgins noted. But that could come as early as late next year, he suggested, because that would extend the pandemic bull market to about five years, the lifespan of the dot-com bubble.

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He predicted that the S&P 500 could reach 6,500 by the end of 2025. That means stock prices will rise another 22% before the bubble starts to deflate.

“Bubbles tend to inflate the most in their final stages, when excitement reaches a sort of fever level,” Higgins warned.

Other market commentators have warned that stocks appear to be in a bubble, with share prices set to blow past a series of record highs in 2024. More extreme forecasters have predicted that stocks could crash by as much as 65% as the hype for AI quickly fades.

Read the original article on Business Insider

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