The artificial intelligence trade may or may not be in a bubble, but regardless of outcome, there remain defensive areas to hide in if the market bursts, according to Capital Economics. James Reilly, CAPITAL ECONOMICS senior markets economist, correctly identified a bearish outlook on the AI rally in early September, noting in a research report that the “AI equity boom is nearing its end.” Now the firm maintains that traditional defensive sectors—including real estate and consumer staples—remain the best bet for serving as sanctuaries should momentum in the AI trade wane, the note states. In its latest analysis, Capital Economics forecasts that the S&P 500 could fall to 6,500 by the end of 2027 if air continues to leak from the AI trade or if the bubble bursts, a decline of roughly 16 %. However, a final rally led by technology stocks is still on the cards for the year, while defensive sectors may be the appropriate shelter over the next twelve months. Should the AI boom turn to bust, the firm sees U.S. Treasury yields as a vital counterbalance, projecting yields to fall and bond prices to rise—with the 10‑year yield having dropped eight times since 1995, after the PHLX Semiconductor Sector Index (SOX) fell more than 35 %. Lower yields would benefit real estate, which has historically fared well when SOX selloffs coincide with falling yields, though it would still decline relative to the broader market. An even stronger defensive choice for weathering an AI bust is consumer staples, which posted solid gains after the early‑2000s tech‑stock peak. The AI trade has recently faced pressure from investor concerns that megacap technology firms such as Meta Platforms, Microsoft, Amazon, and Alphabet are investing billions in AI infrastructure without satisfactory returns, squeezing capital expenditures and margins. Alphabet reported negative free cash flow in its latest quarter, while Meta similarly posted negative free cash flow and raised its full‑year capital‑expenditure target. Unlike past tech selloffs, Capital Economics expects energy and financials to be weaker this time—both sectors have improved, but the decline is not due to AI insularity. Instead, repeated supply shocks, especially for energy commodities, have lifted energy prices and, consequently, Treasury yields, undermining these sectors further.
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