Capital Economics Slashes 2025 S&P 500 Forecast as AI Trade Stumbles
The market is reeling. The S&P 500 just suffered its worst single-day drop since the early pandemic days, plunging 4.8% after Trump’s renewed tariffs sent shockwaves through Wall Street.
With sentiment already shaky, analysts are rushing to slash their stock market forecasts. UBS recently cut its 2025 S&P 500 target from 6,400 to 5,800, while RBC revised its projection from 6,200 to 5,550.
Now, Capital Economics has joined the downgrade brigade. Chief market economist John Higgins has lowered his year-end 2025 forecast from a bullish 7,000 to just 5,500—citing not only trade tensions, but a fading AI-driven rally.
Higgins’ original forecast hinged on two key assumptions: a still-resilient economy and continued investor enthusiasm for AI—particularly in semiconductors and productivity-boosting tech. He even acknowledged that his target assumed a bubble-like surge in valuations fueled by AI optimism.
But that optimism is now fading on two fronts.
“Even before Trump’s announcement, we expected growth to slow,” said Higgins. “We’re not forecasting a recession yet, as tariff revenue may be recycled into the economy, but the risk has certainly risen.”
He also notes that fiscal policy uncertainty—such as the potential lapse of tax cuts—combined with rising inflation could further limit the Fed’s ability to cut rates. Add in geopolitical tension, and the bullish case grows weaker.
On the AI front, Higgins’ concern has shifted. Instead of slowing demand, he now worries about China challenging U.S. dominance in the space. He points to China’s DeepSeek and the potential to monetize large language models using older, cheaper tech—something that could seriously undercut U.S. tech giants.
“If there’s a bubble in AI, it may lie in earnings expectations rather than valuation multiples,” he explains. Analysts have yet to meaningfully downgrade big tech EPS forecasts, but that may be only a matter of time.
Nvidia, once the poster child of the AI boom, has already seen its stock fall nearly 33% from its peak. Higgins isn’t ruling out a rebound in the AI trade—but he believes it won’t happen until the broader economic outlook improves and U.S. tech shows resilience against rising competition.
The downgrade to 5,500 reflects a forward price-to-earnings ratio of around 18, based on a projected 2025 S&P 500 EPS of $305—though Higgins notes this figure may still change.
Looking ahead, he projects a modest 11% gain in 2026 (to 6,000) and an 8% rise in 2027 (to 6,500).
