Panmure Liberum warns: AI bubble to burst within two years, S&P 500 could fall to 5,000 by end of next year

Cailian Press, October 8 (Editor: Bian Chun) — As U.S. stocks hover near record highs and the Federal Reserve begins raising interest rates, the "AI bubble theory" has resurfaced in recent days. The latest warning comes from the head of market strategy at a British investment bank. He issued a stern warning to investors: the artificial intelligence (AI) trade may be about to end and could trigger the worst market crash since the global financial crisis.

This year, global stock markets have soared to record highs, driven by optimism over a surge in investment in AI infrastructure. But Joachim Klement of Panmure Liberum, an independent British investment bank, said his base case is that the AI trade will unravel as soon as 2027 and cause a sharp stock market decline.

"My core judgment is that the AI bubble will burst in 2027 or 2028, that is, sometime in the next two years," Klement said in a recent interview. He noted that hyperscalers' free cash flow has been largely exhausted, while debt costs are rising rapidly, so high that these companies can hardly bear them.

For the S&P 500's target level at the end of 2027, Klement's forecast is 5,000 points, implying 36% downside from current levels. He also expects the European Stoxx 600 index to fall to 430 points, more than 30% below current levels.

Klement began his career at UBS Group more than two decades ago and is one of the earliest to predict the end of the current bull market. As recently as mid-September, his forecast was still that the S&P 500 would reach 8,300 points by the end of next year.

According to Bloomberg Intelligence estimates, hyperscalers' data center capital expenditure in 2026 may more than double last year's to $713 billion. That figure is expected to rise further next year, albeit at a slower pace, underpinning many forecasts for expected earnings of U.S. technology companies.

"Right now everyone in the market has their eyes on only one thing — corporate earnings, especially tech earnings," Klement said. "As long as the AI earnings narrative holds, the market will selectively ignore any headwinds from the macroeconomy, credit conditions or elsewhere."

However, Klement also acknowledged that his bearish call may be premature. He does not advise clients to sell now, but instead recommends they develop contingency plans and timing tools to help identify the starting point of a crash.

His top recommendation is to "go fully defensive" once the S&P 500 falls below its 200-day moving average. In that scenario, he advocates shifting into highly defensive sectors, including food, tobacco and pharmaceutical stocks.

Temasek International's chief investment officer Rohit Sipahimalani warned this week that a reversal in the AI trade is a key risk facing global markets.

In addition, Bridgewater founder and billionaire Ray Dalio warned on Wednesday that the current AI investment boom has the characteristics of a "typical bubble" and that the market is approaching the tipping point where the bubble begins to burst.

Galaxy Digital founder Michael Novogratz said at a conference this week that AI is in "the biggest bubble of our lifetimes," but investors should still participate. He believes the speculative frenzy in tech stocks will continue to heat up.

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