AI bubble risks worst S&P 500 crash since 2008, strategist says

Joachim Klement, head of market strategy at London investment bank Panmure Liberum, warns that the artificial intelligence trade may be nearing an end, potentially triggering the worst market crash since the 2008 global financial crisis. Klement predicts that the AI bubble will burst sometime in the next two years, likely in 2027, causing stocks to sharply decline.

He believes that hyperscalers' free cash flows are nearly exhausted, and rising debt costs are becoming unsustainable for these companies. Klement forecasts a 36% drop in the S&P 500 by year-end, with Europe's Stoxx 600 falling to 430 points, more than 30% lower than current levels. He attributes his change of mind to concerns over persistent inflation and surging borrowing costs necessary to fund AI-related infrastructure.

Klement attributes the current stock market rally to investors' fixation on tech earnings and downplays the impact of macroeconomic and credit risks. Despite his bearish outlook, Klement does not advise clients to sell their positions outright, instead recommending they prepare for a potential market downturn by identifying key technical indicators and shifting investments to defensive sectors.