Analyst warns AI-driven equity rally may collapse by 2027
Capital Economics' James Reilly predicts the S&P 500 could fall about 21% by the end of 2027 after a brief rise this year, citing classic bubble signals.
James Reilly of Capital Economics reiterated his view that one outlet AI-fuelled market surge resembles a late-stage bubble, forecasting the S&P 500 to end 2026 around 8,250 and then tumble to about 6,500 by the close of 2027, a 21% drop. He highlights several bubble indicators: a cyclically adjusted price-to-earnings ratio near dot-com highs, earnings-growth expectations matching those peak levels, and free-cash-flow deficits expected for major AI hyperscalers in 2027.
Reilly also notes extreme concentration of market-cap in a few stocks and a wave of new equity offerings, both historically linked to bubble endings. Rockefeller International chairman Ruchir Sharma warns that 10-year Treasury yields breaching 5% could tighten financing for AI projects. Ed Yardeni has reduced the odds of a “Roaring 2020s” scenario, citing recent oil and bond market moves as unsettling. Collectively, these signals suggest investors may face a sharp correction after one outlet rally.
Why it matters
A potential 21% market correction could erode investor wealth and reshape capital allocation to AI firms.
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