Investing.com — Talk of a U.S. stock market bubble has grown with the S&P 500 near record highs, but some analysts argue the rally still has room to run.
John Higgins, chief markets economist at Capital Economics, sees potential for the index to end 2025 above its current 6,750 forecast and to extend gains into 2026 as AI-related momentum builds.
Stronger-than-expected earnings are one reason. Forward 12-month (FTM) earnings per share (EPS) for the S&P 500 have already reached around $292, well above the $280 Capital Economics had penciled in for end-2025.
Extrapolating the current trend would place EPS at about $299 by the end of 2025 and $331 in 2026. While big tech has led the charge, earnings have also risen across the broader index.
At the same time, valuations remain below dotcom-era extremes. The index’s price-to-forward earnings ratio has barely moved this year, standing near 22.6 versus a peak of 25 in the late 1990s.
Ratios for big tech have even edged down, leaving valuations across the market below levels seen when the last transformative tech bubble burst.
“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 were to hit $331 in 2026 and valuations stretched to 25, the index could climb to roughly 8,275 – more than 1,000 points above Capital Economics’ current end-2026 forecast.
Higgins still expects a major correction once AI enthusiasm peaks, but “we suspect that point may not come before 2027,” he wrote.
Still, some risks remain. Weaker AI demand, economic slowdown, or renewed bond market stress could upset the rally, Higgins said.
But overall, he stresses that current conditions differ from the late 1990s. The U.S. economy appears sturdier than labor data alone suggest, and the Federal Reserve looks set to ease rather than tighten policy.