AI Stock Market Rises Further This Year, But... Wall Street: "Significant Correction Coming in 2027"

▲ IBM, Samsung Electronics, SK Hynix, Bitcoin (BTC), Artificial Intelligence (AI) bubble collapse, bear market / AI generated image ©

Wall Street has warned that the stock market rally led by artificial intelligence (AI) may not end immediately, but it is entering the 'final stage' of a bull market due to excessive valuations and a concentration on a few technology stocks.

According to Finbold, a cryptocurrency media outlet, on September 12 (local time), Capital Economics projected that the S&P 500 index would rise to 8,250 by the end of 2026, driven by strong earnings momentum from AI-related companies. The analysis suggests that not only the US but also stock markets with a high proportion of technology stocks, such as Korea and Taiwan, could maintain a relatively strong trend for the remainder of this year. However, it warned that the AI rally is approaching its final stage, and these markets could experience a significant decline next year.

In particular, Capital Economics expects the S&P 500 index to retreat to around 6,500 by the end of 2027. This is approximately 21% lower than the forecast of 8,250 for the end of 2026. The core concern is the sharply increased valuations 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, currently exceeding 40. This level was last seen just before the dot-com bubble burst. Analysis suggests that most of the S&P 500's gains over the past three years have come from valuation expansion rather than improvements in companies' underlying fundamentals.

The concentration of market gains in a few technology and semiconductor companies was also identified as a risk factor. The proportion of market value concentrated in AI beneficiary stocks is estimated to have surpassed even the technology sector's proportion at the peak of the tech bubble in the late 1990s. Furthermore, an increase in technology-related capital expenditures relative to economic size and the stock market value-to-non-financial corporate net assets ratio nearing an all-time high are signaling market overheating.

However, Capital Economics did not expect the stock market to immediately turn downwards. The question is how long the exceptionally high earnings growth currently supporting AI company share prices can be sustained. It warned that investor sentiment could quickly deteriorate if revenue growth is weaker than expected or if the market re-evaluates AI investment prospects. Previously, the institution had forecast that if the S&P 500 index reached around 8,000 by the end of 2026, the possibility of at least a 30% correction thereafter could gradually increase. While this is a substantial drop, it falls short of the approximately 50% plunge seen after the dot-com bubble burst.

Strong foreign capital flowing into the US stock market, large initial public offerings (IPOs), and an increase in supply due to additional stock sales by large tech companies were also cited as variables that could increase the risk of a decline. Capital Economics' base scenario is that the AI rally still has room for further gains this year, but the market is increasingly showing characteristics of a late-stage bull market where stock prices are outpacing fundamentals. Ultimately, the key warning is that after further gains this year, a significant correction could occur in 2027.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*