The stock market bubble will burst in 2027, and the current rotation is a ‘warning of trouble ahead,’ Capital Economics says
Capital Economics is warning that the powerful shift underway in U.S. equities could signal that a long‑running stock market bubble will burst in 2027, ushering in years of upheaval in leadership across major indexes.
In a Feb. 20 note, John Higgins, chief markets economist at Capital Economics, argues that the recent outperformance of small-cap, value, and defensive stocks relative to large-cap, growth, and cyclical names echoes patterns seen in the late stages of the dotcom boom. “If the aftermath of the dotcom era is any guide,” Higgins wrote, “the bursting of the next bubble in the stock market—which we forecast will occur in 2027—might be followed by periods in which small-cap and value stocks outperformed their peers for a very long time.”
Seen in this light, Higgins continued, the latest rotation in stocks away from tech and toward more value-conscious sectors such as energy “could be a warning of trouble ahead” and a harbinger of more dramatic shifts to come.
So far this year, MSCI indexes tracking small-cap, value, and defensive sector stocks have each outperformed their large‑cap, growth, and cyclical counterparts by roughly 10 percentage points on a total‑return basis, noted Capital Economics. The move is flattened by overlap among the groups. The rotation began quietly in late 2025 but has “gathered momentum” through the early weeks of 2026, even as the overall U.S. market remains elevated by historical standards.
Higgins cautions that, in the context of the post–Global Financial Crisis era’s bullish run, the shift still “barely registers,” making it too early to declare a durable regime change. But he draws a pointed comparison with the run‑up to the 2000 crash, when U.S. small-caps quietly began to outperform large caps about 11 months before the dotcom bubble burst. Back then, the turning point came in April 1999, after four years in which large-cap growth stocks had dominated as the bubble inflated.
One key difference this time is timing within the style spectrum. In the dotcom cycle, value stocks only started to outperform growth meaningfully after the bubble had already burst. By contrast, in early 2026, value is already outpacing growth, which makes the current episode “a little bit different in that respect,” the report says.
The note downplays the role of immediate political or legal shocks in driving this year’s factor and size moves. Higgins does not expect the latest rotation in U.S. equities to be “heavily influenced” by the recent Supreme Court ruling that President Donald Trump’s IEEPA tariffs are illegal, even if the administration seeks alternative ways to raise tariff revenue. The economic consequences of those efforts “may not be that large,” he adds, contrasting them with last year’s “Liberation Day” period, which triggered sharp swings in small‑cap versus large‑cap and value versus growth performance.
