AI Trade Woes Trigger Bearish Forecasters: A Closer Look at Capital Economics’ Downbeat Outlook

It’s a stormy scene in the markets, folks! The S&P 500 has just taken a hefty 4.8% dive, marking its worst day since the COVID-induced chaos of early 2020. That’s right, as if Trump’s tariffs weren’t bad enough to shake things up, analysts are now scrambling to trim their stock market forecasts. Capital Economics has slashed its S&P 500 target for the end of 2025 from an optimistic **7,000** to a grim **5,500**, and they’re not the only ones feeling the chill.

UBS is also joining the chorus, cutting their S&P forecast from **6,400** to **5,800**, while RBC has nudged theirs down to **5,550** from **6,200**. The reason? A deteriorating economy coupled with an expected decline in aggregate earnings per share for the year. In fact, JPMorgan predicts that if Trump’s tariffs stick around, there’s a **60% chance** we may be facing a global recession this year. This sentiment has plenty of seasoned investors fearing a “falling knife” scenario. It’s precisely what Bill Gross, the former ‘Bond King’, cautions against.

Fading Enthusiasm in the AI Sector

At the heart of this downward adjustment by Capital Economics is the fading momentum in the artificial intelligence space. John Higgins, their chief market economist, originally believed the U.S. economy would sustain growth and that AI-related stocks would drive the market bubble. But with the recent shifts, he’s had to reconsider his bullish stance—quite the turnaround!

“Before Trump’s announcement, we had expected growth to slow this year,” Higgins explained. “But after the announcement, we aren’t forecasting a recession, mainly because we expect the tariff revenue to flow back into the economy.” However, the risk of a recession has certainly crept up, affecting the “animal spirits” he had previously expected to reignite.

The Tariff-Induced Economic Sentiment Shift

Rising inflation is another thorn in the side of future Federal Reserve interest rate cuts, and Higgins isn’t the only one voicing concerns. As Congress grapples with tax cut extensions, fiscal policy may end up hindering growth.

Higgins has previously alerted the market to risks surrounding a slower-than-expected AI narrative, but now his concerns have morphed into something more ominous: the potential challenge posed by China. If Chinese tech firms can monetize AI using older and cheaper technology, as proposed by DeepSeek, the dominance of U.S. big tech could be jeopardized.

Reassessing the AI Bubble

Higgins states, “If there is a bubble in AI, it may be in the earnings expectations rather than the multiples being applied.” Analyst estimates for earnings per share (EPS) in the U.S. big-tech sector have yet to see significant downgrades, but Higgins sounds the alarm on the possibility of that changing as the landscape continues to shift.

The AI sector is already feeling the pain, with leading stock Nvidia (NVDA) plummeting around **33%** from its peak. Higgins is cautiously pondering whether the AI trade might find new life, but he remains skeptical: “We doubt investors will rediscover enthusiasm for U.S. big-tech until economic conditions stabilize and until they prove resilient against the emerging threats from China.”

The Revised Game Plan: What’s Next?

So, what does this mean for traders like you? With Capital Economics slashing its S&P 500 target by a staggering **1,500 points**, the new target sits at **5,500**. This aligns with a price-to-earnings multiple of **around 18**, based on an expected S&P 500 EPS of **$305** by 2025. While Higgins sees the potential for a modest recovery with gains of **11%** in 2026 (up to **6,000**) and **8%** in 2027 (to **6,500**), the road ahead appears rocky.

In conclusion, for trend-following traders, now is the time to reassess risk sentiment and remain agile in response to these macroeconomic signals. The AI trade may need to cool off for a breather, and while market opportunities still exist, vigilance is key. Stay sharp out there, traders! The market’s pulse is changing, and the traders who adapt will be the ones to thrive.