By Jason Ma
Investors should enjoy the final months of 2026 while they can, according to analysts, because the AI-led stock market boom looks set to end soon.
James Reilly, senior markets economist at Capital Economics, reiterated an earlier forecast that the S&P 500 will finish this year at 8,250 — up 7.7% from Friday’s close — and then fall 21% to 6,500 by the end of 2027.
“On balance, we think the data look consistent with a late-stage bubble,” he wrote on Thursday. “Most of the factors we consider are at, or close to, levels that have preceded past stock market peaks.”
Reilly highlighted several indicators he has been tracking:
- Valuations: Stock valuations align with a late-stage bubble. The market’s cyclically adjusted price-to-earnings ratio is near its dotcom peak, and the S&P 500’s valuation relative to Treasury bonds is close to dotcom-era extremes.
- Expected earnings growth: Forward 12-month earnings-per-share growth for the S&P 500 is in line with the peak seen during the dotcom bubble, a level Reilly views as unsustainable.
- AI spending and cash flow: The sustainability of massive AI investment is questionable amid heavy spending and shrinking free cash flow; combined free cash flow for the top AI hyperscalers is expected to turn negative in 2027.
- Index concentration: Market-cap concentration in fewer stocks is at extreme levels, and such narrowness has often accompanied unsustainable rallies.
- Equity issuance: IPOs and follow-on offerings are booming, and Reilly warns that this surge of new stock issuance has historically signaled a bubble’s end within months, not years.
Reilly did not mention the recent rise in Treasury yields; the 10-year rate hit 4.97% on Friday.
For Rockefeller International chairman Ruchir Sharma, rising yields are another key bubble-warning sign to watch.
In a recent Financial Times op-ed, Sharma warned the AI bubble could burst if the 10-year yield “decisively breaches” 5%, which he said has been the upper end of its range since the dotcom era.
“This breach would signal the start of a new era of tighter money, in which AI mega projects will be harder to fund,” Sharma added.
Yields above 5% would affect the AI boom in several ways: hyperscalers would likely issue fewer bonds to finance spending, and higher yields have historically been a headwind for new equity issuance. Sharma also noted that yields approaching 5% would begin to match nominal GDP growth, worsening the national debt burden.
While some on Wall Street say yields are merely normalizing after years of suppression by central bank policy, Sharma pointed out that the U.S. is more indebted now — the debt burden has exceeded 100% of GDP — and therefore “debt-servicing costs are much higher now.”
“Rising public borrowing costs will squeeze other borrowers sooner, and hit the bubbly AI markets harder,” he wrote.
Even long-time bulls are growing more cautious. Wall Street veteran Ed Yardeni lowered the probability of his “Roaring 2020s” scenario for the rest of the decade from 80% to 70% and raised the chance of a bearish outcome from 20% to 30%.
“Admittedly, recent developments in the oil and bond markets are unnerving,” he said in a note Saturday.
This story was originally featured on Fortune.com
Source: fortune.com
