Speculation of a U.S. stock market bubble is rising as the S&P 500 trades near record highs. However, several analysts believe the rally still has further room to grow.
John Higgins, chief markets economist at Capital Economics, expects the index could end 2025 above its current forecast of 6,750 and potentially extend gains into 2026, supported by AI-driven momentum.
One major factor is stronger-than-expected earnings. Forward 12-month earnings per share (EPS) for the S&P 500 have already reached around $292, compared to the $280 originally projected for late 2025. Current trends suggest EPS could climb to $299 by the end of 2025 and $331 in 2026. While big tech continues to lead, earnings growth has been broad across the index.
Valuations also remain below dotcom-era extremes. The price-to-forward earnings ratio for the S&P 500 stands at 22.6, compared with a peak of 25 in the late 1990s. Even ratios for big tech have edged lower, leaving valuations across the market below levels seen before the dotcom bubble burst.
Higgins notes that if EPS reached $331 in 2026 and valuations stretched to 25, the index could climb toward 8,275 — over 1,000 points higher than Capital Economics’ current forecast.
That said, Higgins expects a major correction once AI enthusiasm fades, though likely not before 2027. Risks such as weaker AI demand, slower economic growth, or renewed bond market stress could still weigh on markets.
For now, conditions differ from the late 1990s. The U.S. economy appears stronger than labor market data alone suggest, and the Federal Reserve is more likely to ease policy rather than tighten.
