Capital Economics forecasts decline in AI investment and stocks

A new report from Capital Economics suggests that the current surge in artificial intelligence investment is poised to slow significantly, potentially leading to a downturn in the S&P 500 and a drag on U.S. economic growth. Analysts at the firm anticipate that while capital expenditure will continue to rise throughout 2027, the pace of that growth will decelerate before shifting into an outright decline in 2028.

Vicky Redwood, chief economic adviser at Capital Economics, noted that the firm projects the S&P 500 will fall 12% below current levels by the end of 2027. This trajectory would leave the index 17% lower than its peak recorded in early October 2026. The firm expects that markets will begin to price in these changes well before the actual reduction in investment spending takes hold.

The analysis highlights concerns regarding the sustainability of current spending patterns among major technology companies. According to the report, a small group of hyperscalers is expected to spend approximately $800 billion on AI this year, with that figure projected to reach at least $1 trillion in 2027. Redwood stated that for these expenditures to be justified, annual AI-related revenue from external customers would need to increase tenfold by 2030.

Beyond the impact on equity markets, the firm warns of broader economic consequences. Capital Economics estimates that a 10% decline in AI capital expenditure would reduce U.S. GDP growth by 0.1 percentage point. Senior markets economist James Reilly added that the firm expects notably larger declines in indices heavily weighted toward technology stocks as the investment cycle turns.