Stocks are in a bubble that will keep inflating until 2025 and push the market

• The stock market is in a bubble, but that doesn’t mean investors should sell their stocks right now.

• The S&P 500 still has 30% upside between now and the end of 2025, according to Capital Economics.

• “Our end-2025 forecast of 6,500 for the index is premised on its valuation reaching a similar level to its peak during the dot com mania,” Capital Economics said.

The stock market is in a bubble, but that doesn’t mean investors should sell their stocks right now, according to a Monday note from Capital Economics chief markets economist John Higgins.

In fact, based on current valuations there is considerable upside for the stock market between now and the end of 2025, according to Higgins.

“We are sticking to our view that this [stock market bubble] will inflate through the end of next year. Our end-2025 forecast of 6,500 for the index is premised on its valuation reaching a similar level to its peak during the dot com mania,” Higgins said.

Based on current levels, the stock market would have to surge about 30% to reach Higgins’s 2025 year-end price target. Higgins also has a 2024 year-end price target of 5,500, representing a potential upside of 10% from today’s levels and the most bullish forecast on Wall Street.

Both today’s stock market bubble and the dot-com internet bubble of 2000 revolved around the potential economic benefits of a transformative technology. Decades ago it was the advent of the internet, and today it’s generative artificial intelligence.

The S&P 500’s forward price-to-earnings ratio stands at about 20x right now, which is below the 25x peak it reached during the dot-com bubble. That suggests there’s still plenty of upside to be had as long as the narrative around artificial intelligence continues to build.

But valuations have historically proven to be a terrible timing tool for investors, and there’s no telling where valuations might peak this time around, as bubbles in the stock market don’t always follow the same exact roadmap.

“It [is] impossible to know how quickly a bubble will inflate; how big it will get before it bursts; what will cause it to burst; and when it will burst. Nonetheless, our end-2025 and end-2026 forecasts for the S&P 500 are rooted in the idea that a bubble in the index will continue to inflate in the meantime against the backdrop of a modest rise in forward twelve month EPS,” Higgins concluded.

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