Capital Economics Warns AI Bubble Collapse Could Trigger 30% US Stock Market Decline

Capital Economics has issued a warning regarding the late stages of an artificial intelligence-driven market bubble, projecting significant disruptions across global financial markets centered in the United States. In a recent research note, chief economic adviser John Higgins highlighted that the US equity market sits at the epicenter of potential valuation collapse, drawing historical parallels to the dot-com crash. According to the firm's forecast, the S&P 500 is expected to peak at 8,250 by the end of 2026 before dropping approximately 21% to finish 2027 at 6,500. However, Higgins cautioned that the index could ultimately experience a sharper peak-to-trough decline of at least 30%, a drop of a magnitude seen only seven times over the past century. The ripple effects of an AI valuation collapse are expected to affect international equities, though with less severity due to lower technology concentrations outside the US. Additionally, Capital Economics forecasts a depreciation of the US dollar and slight pressure on corporate bond spreads, while Treasury bond rally potential remains more limited than in previous downturns.