Capital Economics has issued a bold prediction that the S&P 500 will surge to approximately 7,000 by the end of 2025, representing a 15% upside from current levels. However, the research firm emphasizes that this rally will be driven entirely by artificial intelligence enthusiasm rather than President-elect Donald Trump’s proposed policies.
While investors have shown euphoric reactions to Trump’s election victory, believing his administration offers the best outcome for stocks, Capital Economics pushes back strongly on this narrative. The firm argues that Trump’s second-term policies will actually prove negative for equities, characterizing them as neither “pro-growth” nor “pro-business.”
The research firm identifies several policy concerns that could disappoint markets. First, Trump may struggle to deliver promised tax cuts even with a Republican Congress, as he lacks a filibuster-proof Senate majority and will face a likely single-digit House majority. The convoluted budget reconciliation process will complicate matters further. Additionally, Republican legislators may hesitate to pursue tax cuts due to bond market concerns about rising US debt—the 10-year Treasury yield already jumped sharply post-election as markets priced in higher interest rates, government spending, and inflation.
Trump’s deregulation promises also face skepticism. Capital Economics notes that similar claims in 2016 had little long-term market impact, despite initially driving financial stocks higher. More concerning are Trump’s proposed tariff and immigration policies, which the firm considers net negatives for the economy. A potential 10%-20% universal tariff on all US imports could significantly weigh on company profits and prospects.
Instead, AI remains the primary catalyst for market gains. “Our bullish forecast for equities rests on our view that AI-enthusiasm will grow further and outweigh any headwind from Trump’s policies,” Capital Economics stated. However, the firm issued a cautionary warning: if the S&P 500 reaches 7,000 purely due to AI hype, it would indicate that a bubble has formed in the US market—one that may have reached the point of bursting. This suggests that while AI enthusiasm will drive near-term gains, investors should remain vigilant about valuation risks in an increasingly AI-dominated market rally.
Key Quotes
However, this has nothing to do with the policies we expect will be delivered. In fact, we think these will be negative for equities, as Trump’s second term proves to be neither ‘pro-growth’ nor ‘pro-business.’
Capital Economics directly challenges the market’s optimistic post-election sentiment, arguing that Trump’s actual policies will disappoint investors who expect business-friendly outcomes.
Instead, our bullish forecast for equities rests on our view that AI-enthusiasm will grow further and outweigh any headwind from Trump’s policies.
The research firm identifies artificial intelligence as the sole driver of their bullish S&P 500 forecast, emphasizing that AI momentum will overcome policy-related headwinds.
That said, the S&P 500 reaching 7,000 due to AI-hype would in our view mean that a bubble has formed in the US and indeed reached the point where it bursts.
Capital Economics issues a critical warning that their own bullish target could paradoxically signal dangerous overvaluation in AI-related stocks, suggesting investors should approach the rally with caution despite the upside potential.
Our Take
Capital Economics’ analysis reveals a critical inflection point in how markets are being valued and driven. The firm’s assertion that AI enthusiasm alone will propel the S&P 500 to 7,000—while simultaneously warning this could signal a bubble—highlights the precarious nature of current market dynamics. This represents a fundamental shift where technological innovation narratives have become more powerful than traditional policy catalysts.
The AI-driven rally reflects genuine transformation across industries, but the concentration of gains in AI-related stocks creates systemic risk. History shows that transformative technologies often experience boom-bust cycles before reaching sustainable adoption. Investors must distinguish between companies with genuine AI capabilities and revenue generation versus those merely riding the hype wave. The simultaneous bullish forecast and bubble warning suggests that while AI’s long-term impact is real, near-term valuations may have disconnected from underlying fundamentals, creating both opportunity and significant downside risk.
Why This Matters
This analysis represents a significant counternarrative to the prevailing post-election market optimism and highlights AI’s dominant role in shaping equity markets. The prediction that AI enthusiasm—not policy changes—will drive the S&P 500 to new heights underscores how deeply artificial intelligence has become embedded in market psychology and valuation models.
The warning about a potential AI bubble is particularly significant for investors and businesses. As AI continues to dominate market gains, concentration risk increases, with a handful of AI-focused technology companies driving index performance. This creates vulnerability if AI developments fail to meet heightened expectations or if the technology’s monetization proves slower than anticipated.
For the broader economy, the disconnect between policy expectations and AI-driven market performance suggests that traditional economic levers may be losing influence compared to technological innovation cycles. Businesses must navigate this environment carefully, balancing investments in AI capabilities while remaining aware that valuations may have outpaced fundamental developments. The acknowledgment that a 7,000 S&P 500 could signal a bubble burst point serves as a crucial risk assessment for portfolio managers and corporate strategists alike.
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