S&P 500 Forecasts Fall—It’s Not Just Tariffs

Capital Economics Slashes S&P 500 Forecast as AI Hype Fizzles

The stock market is in free fall, and forecasts are following suit.

After the S&P 500 plunged 4.8%—its worst day since the COVID crash—analysts are rapidly revising their expectations. The latest cut comes from Capital Economics, where chief market economist John Higgins has slashed his bullish 2025 target from 7,000 to 5,500.

What changed? A toxic combo: rising recession risks from Trump’s new tariffs and a cooling AI trade.

Higgins had been banking on two key drivers for his previous call—moderate economic growth and relentless investor appetite for AI-powered gains, especially in big tech and chip stocks. But now, both pillars are wobbling.

“Even before the tariff news, we expected a slowdown,” Higgins said. “Post-announcement, we still don’t forecast a recession—but the risk is clearly higher.”

He also points to potential drags from stalled tax policy, persistent inflation, and fewer Fed rate cuts than previously hoped.

But the real surprise? His growing concern about China’s emerging challenge to U.S. dominance in AI. Higgins notes that Chinese players like DeepSeek could disrupt the market by monetizing AI with cheaper, older tech—putting U.S. big tech earnings in jeopardy.

If there’s an AI bubble, he suggests, it might be in the earnings projections, not just the lofty valuations. “Analysts haven’t moved to cut EPS forecasts for U.S. tech—but that could be coming,” he warned.

Nvidia, the AI poster child, is already down nearly 33% from its highs. Higgins isn’t ruling out a rebound but says it likely won’t come until macro conditions improve and U.S. firms prove resilient against global threats.

With his new 5,500 target for 2025, Higgins is pricing in a forward P/E of around 18 based on current EPS estimates of $305—though that too may shift.

He now sees a slower recovery ahead: 6,000 in 2026, and 6,500 in 2027.