AI will power the S&P 500 another 27% higher before peaking next year, research firm says

The benchmark index still has room to grow as the rising AI bubble will keep driving stocks higher, Capital Economics says.

• Enthusiasm for AI will drive the S&P 500 to 7,000 by next year, Capital Economics forecasts.
• The firm says AI is a market bubble that will inflate through 2025. 
• Investors are overestimating the macroeconomic benefits of the technology, it said.

The S&P 500 has already breached over thirty record highs this year, and the frenzy for artificial intelligence will keep stocks soaring through 2025, Capital Economics said.

By next year, the benchmark index is set to peak at 7,000, chief economist Neil Shearing predicted in a note from the firm this week.

A rise to that level would mark a 27% increase for the benchmark index.

While early calls on AI suggested that the bull run could last for years to come, Shearing argues that it's a bubble destined to pop — but it'll keep inflating until that happens.

"If we are right in thinking that an asset price bubble is growing around AI – as they have inflated around other breakthrough technologies – then it is likely to inflate further before it bursts," he said. "And burst it will. It's an immutable fact of markets that bubbles come and go."

While the AI market mania has drawn comparisons to the 2000's dot-com bubble, some have dismissed the analogy, noting that today's AI benefactors are nowhere near as overvalued as early internet counterparts.

"I think we'll continue to get solid earnings growth, it's just that investor enthusiasm perhaps outpaces that earnings growth," he said.

In other words, the market is too bullish, too soon when it comes to AI.

While investors have piled into the technology on the idea that it will foster a major productivity boom in the years ahead, the firm's note suggests those benefits will only start to emerge at the end of the decade.

"What appears to be happening is that AI is following the 'Gartner Hype Cycle', which illustrates how views about the impact of new technologies evolve over time," Shearing wrote. "We must surely be somewhere close to the peak of inflated expectations, at least as far as the macroeconomic impact of AI is concerned."

What follows next is pessimism, before the technology actually begins to work its magic on the economy.

Recent months have seen fresh doubts arise about how impactful AI will actually be.

A study by MIT's Daron Acemoglu suggested that the productivity boost is considerably overestimated — instead, AI will only contribute 1% to GDP growth over the next 10 years.

Last month, Goldman Sachs warned that the return on investment in AI may be disappointing for companies: while big firms are estimated to spend $1 trillion on the technology in coming years, AI's performance might not justify the costs.