AI bubble could burst within two years, triggering severe market crash, strategist warns

The artificial-intelligence boom that has powered markets higher could turn into one of Wall Street’s biggest reversals yet, with a London investment-bank strategist warning that the AI trade could begin to disintegrate as soon as next year and send stocks into a severe downturn.

Panmure Liberum’s Joachim Klement sees a scenario in which the AI-driven rally unravels as soon as 2027, dragging the broader market sharply lower. His base case calls for the S&P 500 (SP500) to fall to 5,000 points by the end of 2027, implying a 36% downside from current levels.

That makes him by far the most bearish of seven other strategists tracked by Bloomberg, who on average see the benchmark delivering potential upside of about 14%. Klement also expects Europe’s Stoxx 600 to fall to 430 points, more than 30% below current levels.

“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. Hyperscalers’ free cash flows are largely depleted, while the cost of debt is rising quickly and becoming prohibitive for these firms, he said.

Klement is urging clients to prepare for such a scenario rather than wait for the selloff to begin. He recommends developing contingency plans and timing tools to identify the early stages of a crash, with his top recommendation being to “go full defensive” if the S&P 500 falls below its 200-day moving average.

In that scenario, Klement favors ultra-defensive sectors such as food, tobacco, and pharmaceuticals.

“What I tell people is now is the time to prepare,” Klement said. “Now is the time to make contingency plans for when the market goes into a bear market.”

The warning comes as investors continue to pour enormous amounts of capital into AI-related companies and infrastructure. The spending spree has helped drive technology stocks higher while fueling massive investments in chips, data centers, and other infrastructure needed to support the AI boom.

Bloomberg Intelligence estimates that hyperscalers’ data-center capital spending could more than double from last year’s level in 2026, reaching $713B.

The AI trade has continued to push the broader market to fresh records. The S&P 500 and Nasdaq (COMP:IND) both closed at new highs on Tuesday.

Yet the rally has shown signs of narrowing beneath the surface. Less than half of the stocks in the S&P 500 were trading above their 200-day moving averages on Tuesday, The Wall Street Journal reported, citing Dow Jones Market Data.