AI Boom May Be Entering Final Stage, Analysts Warn

Wall Street analysts from Capital Economics have sounded the alarm on the artificial intelligence (AI) boom, warning that it may be entering its final stage. According to a new assessment, the AI-driven stock market rally is showing signs of excessive optimism and could soon correct.

The research firm expects the S&P 500 to reach 8,250 by year-end 2026, but predicts a sharp decline to 6,500 by the end of 2027. Capital Economics believes that the gains in AI-related equities are becoming increasingly disconnected from underlying fundamentals and notes that valuation levels have climbed sharply since the AI boom began in early 2023.

The cyclically adjusted price-to-earnings (CAPE) ratio has risen by more than 12 points during this period and now stands above 40, a level last seen before the collapse of the dot-com bubble. The firm argues that longer-term valuation measures present a more concerning picture, with traditional forward price-to-earnings metrics appearing less stretched.