Strategist warns of worst S&P 500 crash since 2008 amid AI risks, seeing 36% plunge

The AI bubble will burst in 2027 or 2028, leading to the worst stock-market decline since the 2008 financial crisis, warns Panmure Liberum head of market strategy Joachim Klement, as reported by Bloomberg. The S&P 500 could plunge 36% from current levels, according to his model. That is by far the most bearish view among seven other strategists tracked by Bloomberg. On average, they expect the S&P 500 to rise 14% by the end of 2027.

Klement’s base case is that the current AI-driven stock-market boom will end in 2027, sending equities sharply lower. Hyperscalers’ free cash flows are largely depleted, while the cost of debt is rising rapidly and becoming prohibitive for these companies, he explained to Bloomberg. The strategist expects the S&P 500 to fall from its current level of 7,802 points to 5,000 by the end of 2027. Europe’s Stoxx 600 benchmark, meanwhile, would drop more than 30% to 430 points.

Stocks worldwide have climbed to all-time highs this year, fueled in part by optimism over surging spending on AI infrastructure, Bloomberg notes. Hyperscalers’ data-center capex could more than double in 2026 to $713 billion, according to Bloomberg Intelligence estimates. The figure is expected to continue rising, albeit at a slower pace, and has underpinned many earnings projections for U.S. tech companies.

“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.”

Klement is among the first major institutional market watchers to predict an imminent end to the current bull market, Bloomberg notes. Klement radically revised his forecast in a matter of weeks: as recently as mid-September, his base case had the S&P 500 reaching 8,300 points by the end of next year. The sharp reversal reflects his concern that stubborn inflation, together with an accompanying surge in the borrowing costs needed to fund investment, could derail the AI infrastructure boom.

The strategist is not advising clients to sell assets now, but recommends that they develop contingency plans and use timing tools to help identify the start of a crash. His top piece of advice is “to go full defensive” once the S&P 500 falls below its 200-day moving average, which investors use to identify long-term market trends. If that happens, he advocates looking at “ultra-defensive” sectors, including food, tobacco, and pharmaceutical stocks.

Klement’s position echoes a recent warning from Temasek International chief investment officer Rohit Sipahimalani that an unwinding of the AI trade is a key risk facing global markets, Bloomberg notes.

Bridgewater Associates founder Ray Dalio has expressed a similar view. He described the situation around AI as a “classic bubble” that is nearing a bursting point. The billionaire investor said a huge amount of debt is being taken out to fund AI and that a crash will inevitably follow as interest rates rise. Dalio added that the need for investors to convert accumulated wealth into cash is also heightening the threat.

BofA has also identified signs of a bubble in the U.S. tech sector. The bank’s strategists suggest that investors wary of buying and holding Big Tech stocks can benefit from the rally while avoiding the fallout from a crash by using equity derivatives.

Michael Burry, the protagonist of the "Big Short," has turned to derivatives. In late September, he said in a blog post that he had reshaped his portfolio and replaced all his short positions in the AI sector with put options, betting on a market decline over a shorter time horizon. Burry has long been bearish: in May, he compared the situation to “the last months of the 1999-2000 bubble,” and in August, he warned of a potential crash comparable to Black Monday in 1987.

Citigroup strategists, however, are more sanguine. This week, they said solid corporate earnings in 2027 could support further gains for global equities despite high interest rates and geopolitical risks.