Talk of a bubble in the U.S. stock market has intensified as the S&P 500 approaches record levels, yet some analysts suggest there’s still upside potential.
John Higgins, chief markets economist at Capital Economics, sees room for the index to surpass his current 6,750 forecast for the end of 2025 and possibly extend gains into 2026 as momentum from AI continues to build.
Stronger-than-expected earnings are helping fuel the rally. Forward 12-month (FTM) earnings per share (EPS) for the S&P 500 have already climbed to roughly $292, exceeding Capital Economics’ previous estimate of $280 for year-end 2025.
Projecting the current trajectory, EPS could reach about $299 by year-end and $331 in 2026. While major tech companies have driven the gains, earnings growth is evident across the broader index as well.
Meanwhile, valuations remain below the extremes seen during the dotcom era. The S&P 500’s price-to-forward earnings ratio has remained largely steady this year, around 22.6, compared with the late-1990s peak of 25.
Ratios in big tech have even slightly declined, leaving overall market valuations below levels witnessed during the last tech bubble collapse.
“The upshot is that price/FTM earnings ratios – for the S&P 500; the big-tech sectors combined; and the rest of the index – are still not as high as they were when the dotcom bubble burst,” Higgins said in a note.
If EPS reaches $331 in 2026 and valuations extend to 25, the index could climb to roughly 8,275 – over 1,000 points higher than Capital Economics’ current end-2026 projection.
Higgins expects a significant correction once AI-driven enthusiasm peaks, but “we suspect that point may not come before 2027,” he wrote.
Nonetheless, risks remain. Weaker AI demand, an economic slowdown, or renewed stress in the bond market could disrupt the rally, Higgins noted.
Overall, he emphasizes that today’s conditions differ from the late 1990s. The U.S. economy appears stronger than labor data alone indicate, and the Federal Reserve seems poised to ease rather than tighten policy.
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