Capital Economics has expressed a bearish outlook on the artificial intelligence trade, predicting that the S&P 500 could drop to 6,500 by the end of 2027, representing a 16% decline if the AI bubble bursts. The firm anticipates a final rally in tech stocks this year but advises that defensive sectors will be crucial over the next 12 months.
Real estate and consumer staples are highlighted as the best options for investors seeking stability, particularly as U.S. Treasury yields are expected to fall, which typically benefits real estate.
The report notes that major tech companies like Meta Platforms, Microsoft, Amazon, and Alphabet are facing pressure due to high capital expenditures on AI infrastructure without sufficient returns, leading to negative cash flows.
Unlike previous tech selloffs, Capital Economics suggests that energy and financial sectors may not provide the same level of protection this time, as they have performed better recently due to supply shocks affecting energy prices