Investing.com -- Capital Economics warned in a note Monday that a bursting of the AI bubble could trigger steep falls in global equity markets, modest rallies in some sovereign bonds and a weaker U.S. dollar.

Chief economic adviser John Higgins believes that there are "plenty of signs that we are now in the late stages of a bubble in AI," and that the U.S. stock market would be at the center of any fallout.

"The epicenter of the bursting of the bubble is likely to be the US stock market," he wrote.

The firm's end-2027 forecast of 6,500 for the S&P 500 is roughly 21% below its end-2026 forecast of 8,250, but Higgins said the eventual peak-to-trough decline could be at least 30%, a drop seen only seven times in the past century, including after the dot-com bubble burst, which he views as the most relevant precedent.

Such drawdowns have historically been contagious, he said, though the fallout is likely to be smaller outside the U.S., where markets are generally less tech-heavy.

Furthermore, Capital Economics doubts the huge Treasury rally seen after the dot-com bust would be repeated, given less scope for term premia to fall, but still forecasts developed-market 10-year yields to edge lower by end-2027.

Higgins also expects some fallout in U.S. corporate bonds given very low credit spreads, though smaller than after the dot-com crash. He forecasts the dollar to falter, calling it still more overvalued than it was back then.