As the boom in artificial intelligence has continued for more than a year, the well-known research company Kaitou Macro believes that artificial intelligence will drive US stocks to continue to rise in the short term, but this bubble will eventually burst in 2026.

Will the AI bubble burst in 2026?

KITU macroeconomist Diana Iovanel (Diana Iovanel) and others said in the report that by the end of 2025, the stock market bubble driven by investors' enthusiasm for artificial intelligence will push the S&P 500 index to a high of 6,500 points, which means an increase of more than 27% from the current level (5099.96 points).

However, starting in 2026, as interest rates rise and the inflation rate starts to weigh down stock valuations, the increase in US stocks should decline sharply.

“Ultimately, we expect stocks to return less than the previous 10 years in the next 10 years. We believe that the long-term excellent performance of the US stock market may come to an end.”

Their pessimistic predictions about the future of US stocks and artificial intelligence are somewhat counterintuitive. Because of their reasoning: the growing popularity of artificial intelligence will drive productivity growth, and this kind of economic stimulus will cause higher inflation than most people expect, and at the same time lead to higher interest rates. High inflation and high interest rates are clearly bad for the stock market.

However, high interest rates and high inflation are indeed bad news for stock prices. The recent decline in the stock market proved this: US stocks recently stopped rising because the US March CPI inflation report was higher than expected.

“We suspect that the bubble will eventually burst after the end of next year, leading to a correction in valuations. After all, this dynamic occurred during the internet bubble in the late 1990s and early 21st century, as well as during the Great Crash of 1929.”

In the internet bubble crisis they mentioned, there is also a script similar to this one: new technology productivity appears and stimulates economic development, but it also pushes the stock market bubble to expand and eventually burst.

Bonds > Stocks?

Kaitou Macro believes that the expected bursting of the stock market bubble will benefit bonds rather than stocks in the next 10 years: “As government bond yields stabilize at a high level, we expect returns to be higher.”

Kaitou's macro forecast is that from now until the end of 2033, the average annual return on the US stock market will be only 4.3%, far lower than the long-term average return of about 7% after excluding inflation. Meanwhile, the return on US Treasury bonds is expected to reach 4.5% during the same period, which is slightly higher than the increase in the stock market.

These expected returns are in stark contrast to the average annual return of 13.1% in the US stock market over the past 10 years.

“American exceptionalism may end in the next few years,” KITU macroeconomists predict.

However, they also mentioned that there is a major risk in the outlook they have set, which is that it is difficult to accurately grasp when the stock market bubble will peak and how long the bubble may last to burst.

“When and how the AI-driven stock market bubble will burst is a key risk we anticipate. In particular, one downside risk is that the consequences of a bursting bubble may last more than a year, as was the case after the internet bubble.”

Editor/Jeffrey