Capital Economics believes the AI-driven rally in technology shares has not yet run its course, even though recent market action shows U.S. tech lagging behind emerging-market technology names, the firm said in a note.
In the research note, market economist Elias Hilmer wrote that he still believes "the AI rally has a bit further to run," while acknowledging that the pattern of U.S. underperformance versus emerging markets evokes the closing phase of the dotcom cycle.
Capital Economics highlighted a divergence in recent weeks: "the AI rally has stalled in recent weeks" in the United States, the firm said, while technology-heavy markets in emerging Asia "have continued to ride the wave of AI enthusiasm." Hilmer drew a parallel to what he described as "the final stages of the dotcom bubble," when U.S. stocks lagged even as global equities continued to advance.
Even with those similarities, the research house argued that any AI-fueled froth outside the U.S. is less pronounced than past episodes at home. Capital Economics said an AI bubble in emerging markets "appears smaller than both the AI and the dotcom bubbles in the US." The firm noted that, since late 2022, the MSCI USA Index has still outperformed the MSCI EM Index by roughly 10 percent and that prevailing valuation metrics remain well beneath the levels seen around 2000. As Hilmer put it, "Valuations then arguably looked more frothy than they do today."
Hilmer also outlined a scenario for a significant market correction. If the rally were to unwind, he expects the MSCI USA Index to fall about 12.5 percent from end-2026 to end-2027, compared with a projected 7 percent decline in the MSCI EM Index. The economist suggested that most EM financial markets "appear more stable than in the early 2000s," and said that stronger external positions in Asia along with currency dynamics should help cushion the shock for emerging markets.
In summary, Capital Economics concluded that while risks remain present, the current episode "may play out differently" than past bubbles, and that the AI rally "has further to run."
Summary
Capital Economics' Elias Hilmer contends the AI-driven rally still has upside, despite U.S. tech underperforming emerging-market technology stocks. The firm sees the pattern as resembling late-dotcom behavior but judges the current EM AI froth to be smaller and EM markets to be better positioned to withstand a correction.