- The S&P 500 could soar more than 20% by the end of next year, Capital Economics predicted.
- That's assuming the bond market and AI continue to work in the favor of stocks.
- Falling yields and continuing excitement for AI could boost the S&P 500 to 6,500, the firm said.
The S&P 500 could see another double-digit gain by the end of next year.
That's as long as the bond market cooperates and Wall Street's hype for artificial intelligence continues to work in its favor, according to Capital Economics.
The research firm predicted the benchmark index could climb to 6,500 by the end of 2025, implying a 23% gain from its current level. That's assuming that falling Treasury yields and the AI will continue to boost the market.
Reilly pointed to the recent decline in US Treasury yields, with the yield on the 10-year Treasury plunging over 50 basis points from its peak last year as investors anticipate coming rate cuts from the Fed. Falling yields are typically bullish for stocks, but that's failed to boost the market in recent weeks, as some investors have grown exhausted over the excitement for artificial intelligence.
That's likely to change, though, Reilly said, as the market is still in the early stages of the AI megatrend.
"If both of these forces combine in favor of the stock market over the next year or so, as we expect, that could be a serious tailwind for equities," Reilly said in a recent note to clients. "This expectation that AI hype will increase and that Treasury yields will fall underpins our long-standing forecast for the S&p 500 to hit 6,500 by end-2025."
Some stock market prognosticators have warned the AI-fueled rally will fizzle, or worse, that it's bound to end in a painful bursting of a bubble that has been inflating for the last two years. Investors may be overly focused on a select group of AI players, a classic hallmark of a stock market bubble, Wall Street strategists have warned.
But narrow stock market rallies have the potential to last years, Rielly said, suggesting the stock market run-up could continue for now.
"In any case, we don't expect this narrowing to persist. The dotcom bubble highlighted how hard it is to identify the beneficiaries of a new technology ex-ante. And while investors have been convinced that NVIDIA (the dominant provider of chips) and other big-tech firms were likely winners, we remain at the early stages of the AI revolution and, in our view, of the bubble."
Warnings of a market bubble have proliferated as the S&P 500 notched a series of record-highs this year. By some valuation metrics, stocks look to be at their most overvalued since 1929, one elite investor recently warned, speculating that a stock crash of around 50%-70% isn't out of the question.
Capital Economics has also warned of a stock market correction akin to the 1929 and dot-com crashes, which could begin in early 2026.