Panmure Liberum Warns S&P 500 Could Plunge 35% Amid AI Bubble Concerns
Panmure Liberum warns the S&P 500 could crash 35% to 5,000 by late next year due to an AI bubble burst, mirroring warnings from Ray Dalio and Michael Burry.
Wall Street has climbed to all-time highs this week, driven by technology giants and AI-related stocks. However, British investment bank Panmure Liberum has issued a grim forecast, predicting that the S&P 500 will drop to 5,000 points by the end of next year—a plunge of roughly 35% from its current level, triggered by a sharp reversal in the artificial intelligence sector.
Joachim Klement, research analyst at the investment bank, explained to MarketWatch that equity markets have displayed extraordinary resilience despite mounting obstacles. First, it was rising inflation, which remains stubbornly high; subsequently, long-term bond yields climbed to new heights and continue to do so; and finally, the Federal Reserve and other global central banks began raising interest rates.
"But the third-quarter earnings season, followed by full-year earnings and guidance for 2027 in January, will provide a critical reality check," Klement said. He noted that the market has trapped itself: on one hand, investors are reluctant to see tech giants increase capital expenditures on AI, as any surge in spending could weigh heavily on their stocks, which carry a massive market weight. On the other hand, a slowdown in these expenditures is equally problematic, as it would severely harm sentiment toward beneficiaries of these outlays, primarily chipmakers and data center equipment providers.
"Add to that further interest rate hikes by the Fed and the Bank of England through the end of the year, and the bull market could be cut short more abruptly than expected," Klement warned. "I think the entire bubble will burst either in 2027 or 2028."
Billionaire Ray Dalio also sounded alarm bells, warning that artificial intelligence is a "classic bubble" approaching a bursting point, Bloomberg reported. "We are in the part of the economic cycle that precedes [the burst], but we are getting closer. I think we are close," he said at the Forbes Global CEO Conference in Singapore.
The S&P 500 No Longer Reflects the Broader Market
Klement and Dalio are far from alone in pointing out the extreme concentration of tech giants in the US stock market. The "Magnificent Seven"—Microsoft, Apple, Nvidia, Alphabet, Meta, Amazon, and Tesla—climbed this week to a combined market capitalization approaching $25 trillion, a new all-time high.
This concentration is a core reason why the S&P 500 has increasingly decoupled from the performance of the average stock on Wall Street. The phenomenon has become so pronounced that Goldman Sachs derivatives strategist Brian Garrett wrote in a recent note to clients that the index "no longer behaves like the clearing price for risk." Consequently, the stock market appears healthy and robust on the surface, while under the hood, the performance of most stocks within the index is eroding.
MarketWatch highlighted an analysis by research firm 3Fourteen Research, showing that the median stock—meaning half the stocks generated higher returns and half lower—is down about 27% from its peak over the past year, even as the S&P 500 hovers near record highs. Meanwhile, the three-month correlation between the S&P 500 and its equal-weighted counterpart, which assigns an identical 0.2% weight to every stock, has dropped to its lowest level since at least 2013.
Analysts generally agree that weak market breadth—a condition where more stocks fall than rise—is a characteristic of a market in the late stages of an economic growth cycle. In any case, this situation cannot persist indefinitely, as one of two things must happen: either the market rally broadens and the gap with the average stock narrows (catch-up), or the indices drop to meet the weak market breadth (catch-down).
Lessons from History and Defensive Strategies
Even if weak market breadth is not inherently bad on its own, it is a prominent feature observed prior to major economic disasters, including the dot-com bubble burst in 2000 and the subprime mortgage crisis in 2008. One of the prominent voices on Wall Street warning this week of similarities between those events and the current market climate is Michael Burry, who predicted the 2008 crisis and gained fame through the film "The Big Short."
"The stock market is pretty clearly in the first stage of grief, denial. If history from 2000 and 2008 is any guide, this stage lasts between six and nine months."
Interestingly, this is the exact timeframe cited by Klement in a Bloomberg interview. "I am starting to worry people today about something I think could happen within six to nine months," he said. "The situation today is that people are concentrating on one thing, and one thing only, and that is earnings—specifically tech company earnings. This narrative causes them to ignore every imaginable obstacle, whether in the macro environment, credit, or any other field."
Klement told MarketWatch that in the event of such a collapse, the market's best-performing areas would likely be defensive stocks such as food manufacturers and suppliers, pharmaceuticals, and tobacco. The infrastructure sector could also benefit, excluding companies that have ridden the tailwind of surging energy demand driven by AI expansion. Furthermore, bonds could attract demand later in 2027 as the equity pullback encourages a flight to safety.
Ultimately, Klement notes that he prefers two basic positions in the event of an AI-driven crash: "Cash, and curling up into a fetal position."
