Capital Economics states that the US stock market is poised for one final period of prosperity over the next year, after which the artificial intelligence-driven rally will conclude. The research institution wrote in a report on Monday that it believes the S&P 500 index could rise within the next year, only to subsequently experience a substantial pullback. The firm forecasts the index will climb to 8000 points in 2026, before declining to 7000 points in 2027—a drop of approximately 13%—returning to "more normal levels." Economists Jennifer McKeown and William Jackson at Capital Economics wrote: "A more likely scenario is that the stock market could 'crumble under its own weight' as investors reassess the high valuations of large technology companies, while still maintaining belief in the long-term economic benefits of AI." They added that, in a worst-case scenario, the market could experience a correction as steep as 30%. The firm anticipates a double-digit decline for several key reasons: 1. Valuations Becoming Excessive While corporate earnings are strong, valuations, though high, are not yet excessive. However, technology stock prices are elevated and may continue to rise. Capital Economics pointed out that the price-to-earnings ratio of the US technology sector—based on projected earnings for the next 12 months—is one metric used to gauge stock valuation levels. According to the firm's analysis, this ratio surged last year to its highest level since the dot-com bubble burst, before moderating somewhat. Capital Economics stated: "We suspect that as the rally continues, there is a significant possibility of valuations rising further. In fact, although we do not believe current valuations are excessively high, it would not be surprising if investor enthusiasm for AI technology pushes valuations to levels that may be unsustainable in the long term." 2. Potential for Rapid Slowdown in Tech Company Earnings Despite an optimistic earnings outlook, profit growth for the S&P 500 is heavily concentrated in the technology sector, making it a key vulnerability for overvaluation. "Admittedly, it's possible that earnings expectations themselves, rather than valuations, could become 'frothy,' and the rapid profit growth of tech companies may eventually revert to more rational levels, even if that does not appear likely this year." 3. Potential for a US Economic Slowdown Capital Economics indicated that the AI-driven rally could also be threatened if the US economy begins to slow significantly. However, the firm also noted that current economic growth appears very healthy, with a "small" risk of recession. 4. AI Demand Could Weaken, Facing Competition from China The development of artificial intelligence might also fall short of investors' initial expectations, or China could potentially surpass the US at the technological frontier. Capital Economics highlighted that concerns persist regarding AI capital expenditure, a key issue that has loomed over the market and triggered several sell-offs over the past year. Anxieties about Chinese AI innovation also triggered a significant sell-off in early 2025. Discussing competition from China, Capital Economics' Head of Markets stated: "On the surface, this poses a substantial threat to large US tech companies." However, he also noted that factors such as the "hardware advantage" possessed by US companies could protect the tech industry. 5. Geopolitical Risks to the Rally This year, the market has already experienced how geopolitical tensions can dampen enthusiasm for AI. Capital Economics pointed out that recent market volatility stemmed from threats made by former US President Donald Trump regarding Greenland. The firm added that, given Europe is a significant market for the US technology sector, future geopolitical conflicts could have a more pronounced impact on AI-related trading. According to Capital Economics' analysis, US allies and partners in Europe contribute approximately 40% of tech company revenues. "But our sense is that for these risks to have a lasting impact on the AI rally, they would either need to significantly affect the US economy itself or substantially impact tech company earnings through other channels," the Head of Markets补充道.