A report from Capital Economics has raised serious concerns regarding a significant shift in the U.S. equity landscape, potentially indicating an imminent end to a long-standing stock market bubble. According to John Higgins, the chief markets economist at Capital Economics, this shift could lead to a major stock market correction in 2027, followed by years of upheaval among major market indices.
In a recent analysis, Higgins highlighted that the notable outperformance of small-cap, value, and defensive stocks compared to large-cap, growth, and cyclical names mirrors patterns observed just before the collapse of the dotcom bubble. This shift, he noted, began quietly in late 2025 and has gained momentum into early 2026, even as the broader U.S. market remains at historically high levels.
The data shows that, thus far this year, indices tracking small-cap, value, and defensive sector stocks have outperformed their larger counterparts by approximately 10 percentage points. While Higgins emphasizes that the current rotation is still too nascent to confirm a definitive change in market regime, he draws a stark parallel to the events leading up to the 2000 crash—when small-cap stocks started to gain traction nearly a year before the bubble burst.
One notable distinction in today’s market is the timing within the investment style spectrum. In the previous cycle, value stocks only started outpacing growth after the bubble had already burst. Conversely, the current scenario shows that value stocks are outperforming growth early in the cycle, suggesting a different dynamic at play.
Higgins does not attribute the recent market shifts to immediate political developments, such as the Supreme Court ruling that concerned tariffs imposed by the Trump administration. He argues that the economic impact of these legal challenges is likely to be minimal, especially when contrasted with last year’s significant market fluctuations resulting from perceived economic changes.
Instead, the report identifies market internals as a crucial indicator. With headline indexes remaining elevated and increasing investor scrutiny on valuations, the internal shifts suggest that investors are beginning to explore undervalued segments of the market. This could be seen as a protective measure against the potential unraveling of the megacap growth stocks that have driven the market surge.
While this rotation could be interpreted as a warning sign of an impending market downturn, it may also indicate a common reassessment of risk rather than certainty of a bubble burst. Historical precedent shows that similar rotations have occurred without leading to a crash and are often a healthy market reaction to what was once termed “irrational exuberance.”
The comparisons to the dotcom era remain compelling; however, they can be selective. The late 1990s were characterized by extreme valuations focused on a narrow band of unprofitable tech companies, which is markedly different from today’s market landscape, where leading firms boast strong earnings and robust cash flows.
For a genuine market bubble to exist, there must typically be a large disconnect between prices and fundamental earnings or balance sheet strength. Although current valuations in sectors like technology may be high, they are often underpinned by substantial profitability and growth prospects. These fundamentals may justify elevated price levels and enable earnings to align more closely with valuations over time.
In summary, while the signals from the market may raise alarms about possible future turbulence, the current conditions also reflect a complex landscape that warrants cautious observation rather than immediate panic.
