Investors seeking indicators of a potential market bubble should brace for the stock market to surge by another 20% before experiencing a correction, according to researchers at Capital Economics.
The firm has highlighted the recent upward trend in stocks, with the S&P 500 and Dow Jones Industrial Average hitting new records and major indexes poised to reach unprecedented highs as the week commenced.
However, for those attempting to drive the bull market even higher, it’s crucial to understand the market's limitations. John Higgins, Chief Market Economist at Capital Economics, suggests that stocks are currently in a late-stage bubble, indicating a significant rally before an eventual downturn.
“There’s always a temptation to chase the market higher, but it’s not advisable at this stage,” Higgins stated in a recent podcast. “The narrative we’ve been discussing for over a year now seems to be unfolding. Essentially, it’s a story of a bubble inflating in the stock market,” he explained, noting the fervor surrounding big tech stocks.
Higgins compared Wall Street’s current enthusiasm for AI to the hype around internet stocks in the 1990s, a period that culminated in a massive market correction. The Nasdaq Composite plummeted by 77% from its peak in the early 2000s, and the overall market saw a $5 trillion loss in value by 2002.
Predicting the precise timing of a bubble burst, the depth of the market decline, or the catalyst for the correction is “impossible,” according to Higgins. However, he suggested that a correction could occur as early as the end of next year, marking about five years since the pandemic bull market began, similar to the lifespan of the dot-com bubble.
Higgins forecasts that the S&P 500 could reach 6,500 by the end of 2025, implying a further 22% rise before the bubble starts to deflate.
“Bubbles tend to inflate the most in their final stages as the excitement reaches a peak,” Higgins warned.
Other market analysts have also indicated that stocks appear to be in a bubble, noting the series of record highs achieved in 2024. Some extreme forecasters predict that stocks could plummet by as much as 65% as the AI-driven hype quickly dissipates.
