Capital Economics has outlined the potential consequences of a collapse in artificial intelligence-related stock valuations, forecasting substantial declines in global equities, limited gains in some government bonds and a weaker US dollar.
In a note published this week, chief economic adviser John Higgins said he sees “plenty of signs that we are now in the late stages of a bubble in AI,” identifying the US equity market as the primary source of potential disruption.
“The epicenter of the bursting of the bubble is likely to be the US stock market,” he wrote.
Capital Economics forecasts the S&P 500 will finish 2027 at 6,500, approximately 21% below its projected end-2026 level of 8,250. However, Higgins believes the index could experience a peak-to-trough decline of at least 30%.
He noted that declines of this magnitude have occurred only seven times over the past century, including during the collapse of the dot-com bubble, which he considers the most relevant historical comparison.
The firm expects any US equity downturn to affect international markets, although Higgins anticipates smaller declines outside the United States because other markets generally have lower concentrations of technology stocks.
In fixed income, Capital Economics does not expect a repeat of the substantial US Treasury rally that followed the dot-com collapse. The firm cited more limited scope for term premia to decline, although it still forecasts a modest reduction in developed-market 10-year government bond yields by the end of 2027.
Higgins also anticipates some pressure on US corporate bonds, citing currently low credit spreads. However, he expects the impact to be less pronounced than during the dot-com downturn.
The firm additionally forecasts a depreciation of the US dollar. Higgins considers the currency more overvalued than it was during the earlier technology market collapse, suggesting that a reversal in AI-related equity valuations could coincide with a decline in the dollar.
The projections reflect Capital Economics’ assessment of a potential AI-related market correction rather than an established market outcome.
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