An artificial-intelligence downturn could push the S&P 500 to 5,000 by the end of 2027, analysts warned, urging investors to scrutinize hyperscaler spending during earnings season.
Joachim Klement and Francisca Reis of Panmure Liberum said an AI-sector downturn could sharply reduce the benchmark’s value. Klement said, “..the upcoming Q3 earnings season and then the full-year earnings and guidance for 2027 in January will provide a critical reality check,” MarketWatch reported on Monday.
Klement said investors face a capital-spending dilemma. Rising hyperscaler outlays could weigh on heavily represented technology stocks, while weaker spending could undermine chipmakers and data-center equipment manufacturers.
Projections cited by Klement indicate hyperscaler capital expenditures could reach $1.2 trillion in 2027. He said an AI bubble could burst in 2027 or 2028, potentially alongside additional rate increases from the Federal Reserve and Bank of England.
During a downturn, Klement favors defensive areas such as food producers and retailers, pharmaceuticals and tobacco. He added that utilities could also be a “good bet”, excluding those driven higher by expected AI-related energy demand.
On Friday, the S&P 500 closed 0.73% at 7,722.72.
AI Build-Out Sparks Bubble Warnings
The warning comes as AI’s market narrative remains increasingly dependent on enormous capital commitments. In September, JPMorgan CEO Jamie Dimon said that AI spending could reach $1 trillion in 2027, up from $700 billion this year, boosting GDP but potentially adding inflation.
Market research platform Bull Theory warned that a Republican loss in the November midterms could trigger an AI bubble burst as the industry becomes increasingly dependent on capital spending and external financing. Hyperscalers are expected to invest nearly $800 billion in 2026, with AI spending consuming 93% of their cash flow and bond issuance reaching about $250 billion, said the firm.
Dot-Com Bubble Parallels
Investor Whitney Tilson noted that five companies —Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ:GOOG), Amazon.com Inc. (NASDAQ: AMZN), Meta Platforms Inc. (NASDAQ: META), Microsoft Corp. (NASDAQ: MSFT) and Oracle Corp. (NYSE: ORCL)— account for a significant share of AI infrastructure spending.
He warned that the industry’s reliance on debt could increase financial risks. He also believes that AI resembles the dot-com bubble, citing eight similarities, including unproven business models, heavy losses, potential regulation, Chinese competition, circular financing, rising debt and investor enthusiasm around a perceived "new paradigm."
Price Action: On a year-to-date basis, the SPDR S&P 500 ETF Trust (NYSE: SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq-100, respectively, surged 12.86% and 22.02%, as per Benzinga Pro.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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