Analyst predicts late-stage stock market bubble could trigger 21% drop by 2027

Capital Economics senior markets economist James Reilly said the S&P 500 is likely to close 2024 at 8,250, roughly 7.7% above its recent level, before slipping to around 6,500 by the end of 2027, a drop of about 21%.

"On balance, we think the data look consistent with a late-stage bubble," Reilly wrote in a Thursday note, adding that many indicators are near levels seen before earlier market peaks.

He highlighted several metrics: the cyclically adjusted price-to-earnings ratio is close to its dot-com-era high, forward earnings growth mirrors that period, and the concentration of market capitalisation in a few stocks is at extreme levels. Reilly also noted a surge in equity issuance and projected that free cash flow for leading AI hyperscalers could turn negative by 2027.

Rockefeller International chairman Ruchir Sharma warned that a 10-year Treasury yield above 5% would further pressure the AI-driven rally, citing higher borrowing costs and the growing debt burden.

"This breach would signal the start of a new era of tighter money, in which AI mega projects will be harder to fund," Sharma said in a Financial Times op-ed.

Wall Street veteran Ed Yardeni reduced the probability of a continued strong market from 80% to 70% and raised the chance of a bearish outcome to 30%, noting recent oil and bond market movements as unsettling.