S&P 500 Could Plunge to 5,000 by End of Next Year? Warnings Resurface as Strategist Predicts AI Bubble Burst Within Two Years
As Wall Street hovers near historic highs against a backdrop of renewed Federal Reserve tightening, warnings of an artificial intelligence bubble are returning to the fore.
The latest caution comes from a UK investment bank strategist, who issued a blunt warning to institutional clients: the AI-driven market cycle may be nearing its end, threatening the steepest market drawdown since the 2008 global financial crisis.
Global equity benchmarks have set repeated records this year, powered by optimism surrounding historic capital deployments across AI infrastructure.
However, Joachim Klement, Head of Strategy at independent UK investment bank Panmure Liberum, outlined a base-case scenario where the AI trade begins unraveling as early as 2027, triggering a severe equity liquidation.
"My core thesis is that the AI bubble bursts in 2027 or 2028—sometime within the next two years," Klement said in a recent interview. He highlighted that hyperscalers' free cash flows have been largely depleted, while debt financing costs are escalating at an unsustainable pace.
Klement established a year-end 2027 price target of 5,000 for the S&P 500, implying a 36% drawdown from current levels. Across the Atlantic, he models the pan-European Stoxx 600 sliding to 430, representing a drop of over 30%.
Klement, who began his financial career at UBS more than two decades ago, is among the first prominent strategists to call an outright end to the prevailing bull market. The forecast marks an abrupt pivot from mid-September, when he still projected the S&P 500 to hit 8,300 by the end of next year.
This reversal mirrors mounting institutional unease: persistent inflation and a sharp surge in borrowing costs to fund AI capital expenditure risk derailing the infrastructure boom.
Bloomberg Intelligence estimates that hyperscalers' data center capex could more than double from last year to reach $713 billion in 2026.
While growth is slated to moderate next year, nominal spending will continue expanding—a reality underwriting Wall Street's aggressive forward earnings revisions for Big Tech.
"Right now, market participants have tunnel vision on a single metric—corporate earnings, particularly tech earnings," Klement noted. "As long as the AI earnings narrative holds, the market is choosing to disregard headwinds across the macro backdrop, credit conditions, and beyond."
Even so, Klement acknowledged his bearish call could prove premature. Rather than advising immediate liquidations, he recommends that clients establish contingency protocols and tactical timing mechanisms to identify early signs of systemic exhaustion.
His primary rule of thumb: rotate into pure defense the moment the S&P 500 breaches its 200-day moving average. Under that trigger, he advocates shifting capital into classic non-cyclical defensive pockets, including consumer staples, tobacco, and pharmaceuticals.
Echoes of an 'AI Bubble' Grow Louder Across the Street
Debate surrounding the longevity of the AI expansion has intensified in recent sessions, with an expanding chorus of institutional investors pointing to textbook bubble dynamics, dividing market participants between trend-following and risk mitigation.
Temasek International: Chief Investment Officer Rohit Sipahimalani warned this week that a potential reversal in the AI trade represents a primary systemic vulnerability facing global capital markets.
Bridgewater Associates: Founder Ray Dalio warned on Wednesday that the ongoing AI investment frenzy exhibits the "classic hallmarks of a bubble," cautioning that financial markets are nearing the inflection point where speculative bubbles historically begin to burst.
Galaxy Digital: Founder Michael Novogratz remarked at an industry conference this week that AI represents "the biggest bubble of our lifetime," though he argued investors should still participate tactically as speculative momentum across tech names has room to run.