The stock market will inflate another 20% before the bubble bursts, research firm says

The S&P 500 will soar to 6,500 before it could face a major correction, Capital Economics predicted.

• The stock has another 20% rise left in it before the bubble deflates, Capital Economics predicted.
• The research firm forecast the S&P 500 to notch 6,500 before staging a correction. 
• That's because stocks tend to inflate rapidly right before the end of a bubble, the firm said. 

Investors on the lookout for signs of a bubble should expect the stock market to be pumped up by another 20% before correcting, Capital Economics researchers said. 

The research firm pointed to the latest run-up in stocks, with the S&P 500 and Dow Jones Industrial Average recently notching fresh records and major indexes headed for new all-time highs as the week kicked off on Monday. 

But investors trying to push the bull market higher should know that there's only so much more the market can gain. According to John Higgins, Capital Economics' chief market economist, stocks look like they're in a late-stage bubble, meaning equities are in for a steep rally before the bubble eventually bursts.

"There's always the temptation to sort of chase the market higher, but I'm not convinced that you should be doing that at this stage. The … story that we've been telling a year or so ago appears to be coming true," Higgins said in a recent podcast. "What is that story? I think that it's a simple one really that involves a bubble inflating in the stock market," he said, pointing to the excitement for big tech.

Wall Street's enthusiasm for AI mirrors the hype around internet stocks in the 90s, Higgins noted, which should be an omen for the market. The Nasdaq Composite lost 77% peak-to-trough in the early 2000s, with the overall market seeing $5 trillion in value wiped out by 2002.

It's "impossible" to predict when the bubble will finally burst, how deep stocks will fall, or what will trigger the correction, Higgins noted. But one could come as soon as the end of next year, he suggested, as that would lengthen the pandemic bull market to about 5 years, the lifespan of the dot-com bubble.

He predicted the S&P 500 could notch 6,500 by the end of 2025. That implies another 22% run-up in stocks before the bubble begins to deflate. 

"Bubbles tend to inflate the most in their final stages as the excitement sort of reaches fever-pitch," Higgins warned. 

Other market commentators have warned stocks look to be in a bubble, with stock prices blowing past a series of record highs in 2024. More extreme forecasters have predicted that stocks could crash as much as 65% as the hype for AI rapidly unwinds.