The global stock market’s powerful rally could face a sharp reversal if the artificial intelligence investment boom loses momentum, according to Panmure Liberum’s head of market strategy Joachim Klement.
Klement expects the AI trade to unravel as soon as 2027, potentially triggering one of the most severe market downturns since the global financial crisis.
His warning comes as equities trade near record levels, supported in part by expectations for continued spending on AI infrastructure.
“My core conviction is that the AI bubble will either burst in 2027 or in 2028, so sometime in the next two years,” Klement said in an interview as reported by Bloomberg.
He expects the S&P 500 to end 2027 at 5,000 points, implying a 36% decline from current levels.
That makes him the most bearish of eight strategists tracked by Bloomberg, with the others collectively expecting an average gain of 14%.
Klement also sees Europe’s Stoxx 600 falling to 430 points, more than 30% below current levels.
Rising costs threaten AI spending
Klement’s bearish outlook is driven partly by the financing requirements behind the AI boom.
Data-center capital spending by hyperscalers is expected to more than double in 2026 to $713 billion, according to Bloomberg Intelligence estimates.
Spending is expected to rise again next year, although at a slower pace.
He said hyperscalers’ free cash flows have been largely depleted, while borrowing costs are rising rapidly and could become prohibitive.
His stance marks a significant reversal.
As recently as mid-September, Klement had expected the S&P 500 to reach 8,300 points by the end of next year.
The change reflects growing concerns that persistent inflation and higher interest rates could increase the cost of financing the enormous investments required to build AI infrastructure.
“If we keep seeing higher bond yields and interest rates, we think the end of the equity bull market may be closer than many investors think,” he said.
Earnings face a crucial test
Klement acknowledged that strong corporate earnings and resilient economic data continue to support equities.
However, he said the upcoming third-quarter earnings season and companies’ 2027 forecasts early next year could determine whether that strength can continue.
“It is a situation where people are just focusing on one thing and one thing only, and that is earnings and in particular tech earnings,” Klement said.
“And they excuse every macro, credit or whatever headwind that you can come up with with that story.”
The warning is not isolated.
Temasek International chief investment officer Rohit Sipahimalani has also identified a reversal of the AI trade as a key risk for global markets.
Wall Street remains more bullish
Klement’s forecast stands well apart from the broader market consensus.
Several brokerages expect the S&P 500 to end 2026 at or above 8,000 and for the bull market to continue into 2027.
Citigroup strategists said this week that solid 2027 earnings could support further gains in global equities despite higher interest rates and geopolitical risks.
Jefferies has projected that the S&P 500 could reach 9,000 by the end of 2027.
The wide gap between those forecasts highlights the market’s central debate: whether AI-driven earnings growth can justify increasingly expensive infrastructure investment, or whether higher financing costs will eventually expose weaknesses beneath the rally.
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