Capital Economics warns the stock market bubble could burst sooner than we think
An underlying stock rotation has triggered a potential countdown to a crash.
Feb. 25 2026, Published 9:26 a.m. ET
Leading global macroeconomic firm, Capital Economics, has shared a warning about a major shift that is underway in the U.S. equities market. Pointing to the shift, the firm's chief economist, John Higgins, noted that it was eerily similar to the lead-up to the dot-com crash, and that it could potentially burst a long-running stock market bubble in 2027. He further added that the event could then usher in a rotation of stocks with a major change in leadership across indexes.
In a note, Higgins shared that the recent performance of small-cap stocks and defensive stocks compared to large-cap growth shows a cyclical pattern that was seen in the late stages of the dotcom boom. As per Fortune, the MSCI indexes tracking small-cap, value, and defensive sector stocks have outperformed large‑cap, growth, and cyclical counterparts by about 10 percentage points. The shift began in 2025, but it has picked up pace in the early weeks of 2026. This, Higgins noted, was a cautionary development, as in the run-up to the 2000 dotcom crash, U.S. small-caps quietly began to outperform large caps about 11 months before the bubble burst.
Higgins added that the latest shift is away from tech stocks and more toward value-conscious sectors like energy, which is why it “could be a warning of trouble ahead.” He explained that post the crash, the stock rotation will probably continue for years to come. “If the aftermath of the dotcom era is any guide, the bursting of the next bubble in the stock market—which we forecast will occur in 2027—might be followed by periods in which small-cap and value stocks outperformed their peers for a very long time," Higgins wrote.
However, there is a key difference between the current shift and the dotcom era rotation, which makes the situation “a little bit different in that respect,” as per the report. The note downplayed the impact of external shocks like political or legal movements, and Higgins said he doesn't expect the latest Supreme Court ruling on tariffs to "heavily influence" the movement in U.S. equities. Instead, the report took a combination of elevated headline indexes, growing investor interest in valuations, and a leadership shift in the stock market as the primary factors.
Furthermore, the bubble looks different from previous crises, as the recent rotation could be a routine risk reassessment and valuation rather than an impending crash, as per Fortune. Previously, Federal Reserve Chair Alan Greenspan, who infamously presided over the inflation of the dotcom crash, called such speculation "irrational exuberance" as similar rotations had occurred in the past as a part of a healthy market practice. Another way in which the current scenario is different is that in the late 1990s, unprofitable tech companies saw extreme valuation concentration, whereas today's big tech has robust earnings, dominant market positions, and enormous cash flow. Thus, the typical requirement for a bubble burst, which is a large disconnect between stock prices and underlying earnings, is sort of missing.
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