Analysts at Capital Economics highlighted this week that even after years of strong gains and record highs, the S&P 500 still has room to grow, with artificial intelligence, Federal Reserve policy, and broader economic trends shaping the index’s trajectory.
“It can be tempting to think the risks will be skewed to the downside,” the firm noted, reflecting on the recent all-time high. “But 12-month inflation-adjusted returns since 1964 have been slightly stronger following new all-time highs compared to the average day.”
The analysts also pointed out that, although data can be “sensitive to time horizons,” they “don’t find any compelling evidence that real returns are significantly different to average after hitting all-time highs.”
“The upshot is that while headlines about the level and momentum of the stock market are understandable, we aren’t convinced either has a clear implication for future returns.”
Performance after such milestones, they added, depends on traditional market drivers like Fed rate cuts, GDP growth, valuations, and emerging technologies. “On past form, the macro backdrop we envisage over the next year…looks consistent with decent returns,” the note said. “But given starting valuations and the fact 125bps worth of cuts are priced, we think the cyclical backdrop is consistent with the S&P 500 drifting sideways.”
However, the analysts see a secular tailwind in AI. “We continue to think that the rally in AI-related stocks has room to run, lifting the S&P 500 both in absolute terms and relative to markets elsewhere,” Capital Economics concluded, forecasting the S&P 500 could reach 7,250 by the end of 2026.
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