From Fortune · Jason Ma · · 1m 30s
Wall Street's late-stage bubble warning
Capital Economics sees one more good year for stocks, then a 21% drop as the AI trade runs out of cheap money.
In brief
Capital Economics sees one more good year for stocks, then a 21% drop as the AI trade runs out of cheap money. The bubble signals analysts track are all flashing at once, and a 10-year Treasury yield decisively above 5% is the trigger to watch. Originally reported by Fortune.
Enjoy 2026 while it lasts
James Reilly of Capital Economics still sees the S&P 500 climbing to 8,250 by year end, up 7.7%. Then he expects a 21% slide to 6,500 by the end of 2027.
“On balance, we think the data look consistent with a late-stage bubble.”
Valuations look like 1999
The cyclically adjusted price-to-earnings ratio is near its dotcom peak. Stocks measured against Treasury bonds are also close to dotcom extremes.
The earnings math breaks
Forward 12-month earnings growth for the S&P 500 matches the dotcom peak. Meanwhile the top AI hyperscalers' combined free cash flow is expected to go negative in 2027.
Too few stocks, too many IPOs
Index gains are concentrated in a handful of names, a pattern that usually precedes trouble. A flood of IPOs and follow-on offerings has historically marked the end in months, not years.
Five percent is the trigger
Rockefeller International's Ruchir Sharma says a 10-year yield decisively above 5% pops the AI bubble. It hit 4.97% on Friday.
“This breach would signal the start of a new era of tighter money, in which AI mega projects will be harder to fund.”
Even the bulls are flinching
Sharma notes US debt now tops 100% of GDP, so higher borrowing costs squeeze everyone. Ed Yardeni cut his bullish "Roaring 2020s" odds from 80% to 70%.
“Admittedly, recent developments in the oil and bond markets are unnerving.”
In short
The bubble signals analysts track are all flashing at once, and a 10-year Treasury yield decisively above 5% is the trigger to watch.
