Capital Economics Forecasts 15% S&P 500 Drop While Analysts Debate Whether Bond Rally Has Legs

Capital Economics senior markets economist James Reilly warned Tuesday that stocks are heading for a major fall, projecting the S&P 500 will slide to 6,500 by end of 2026, a decline of more than 15% from Monday's close. The firm argues that as equity prices weaken, bonds will catch a bid, pushing the benchmark 10-year Treasury yield down to 4.25% by end of 2027. The call comes after the Nasdaq Composite logged its worst weekly performance since June last week, falling more than 4%, as concern mounted over potential oversupply in memory chips and excessive debt financing among AI-related companies. The iShares Semiconductor ETF fell for a ninth consecutive day, the longest such streak in 20 years.

Nomura cross-asset strategist Charlie McElligott attributed the recent market turbulence to a combination of a bond squeeze and AI-driven jitters, which he sees forcing sharp reversals across popular positioning. Treasuries themselves had a choppy session Tuesday, advancing early before giving back most of those gains by midday, leaving only a modest positive finish.

Analysts remain divided on whether the recent Treasury recovery has staying power. A Seeking Alpha analyst cautioned that it is unclear whether the move constitutes a genuine rebound or a dead-cat bounce, while Reuters and ETF-focused commentary urged investors not to abandon bonds, pointing to the potential for equities to roll over and send capital back into fixed income. Capital Economics' 10-year yield target of 4.25% by end of 2027 would represent a meaningful rally from current levels.