Wall Street raises S&P 500 forecasts - while the European Central Bank warns of a correction

The strong second-quarter earnings season has pushed Wall Street to new highs in recent weeks, despite a challenging geopolitical reality and concerns surrounding the massive capital expenditures on AI. A series of investment banks and respected analysts have recently raised their forecasts for the S&P 500; but unlike them, the European Central Bank (ECB) is now warning that a correction in tech stocks is a plausible scenario that could threaten the financial stability of the Eurozone.

In a post published on the ECB blog, the bank's economists wrote that a pullback in the tech sector does not necessarily have to be driven by irrational exuberance, and that "it should be expected even if current valuations are reasonable." The economists emphasized that although most of the gains in tech stocks in recent years occurred on Wall Street, the warning also applies to Europe: according to them, the exposure of Eurozone households to US tech stocks stands at about 440 billion euros, while insurance companies and pension funds are significantly exposed to the "Magnificent Seven" stocks — Nvidia, Apple, Amazon, Alphabet (Google), Tesla, Meta, and Microsoft.

Similar to other investment firms that recently published warnings against the development of an artificial intelligence bubble, the economists compared the AI boom to other periods of innovation such as the 19th-century railroad boom and the 2000 dot-com bubble. According to them, "in each of these cases, a revolutionary technology attracted investment, and the valuations of companies that adopted it rose sharply, before falling sharply."

A common argument by analysts who do not believe that artificial intelligence is a bubble is that investment portfolios today are much more diversified than in the past. The ECB economists addressed this and wrote that uncertainty is spreading across the economy, and therefore it cannot be reduced through risk diversification. They noted that although successful AI adoption can provide a tailwind to profits, the rise in this risk premium pushes stock valuations in the opposite direction — and thus stock prices can fall, even if the technology itself succeeds.

"If artificial intelligence proves to be revolutionary enough, valuations could still be much higher in the future, even after a correction," the economists wrote. "However, the exact timing [of a correction] is not known in advance. These boom-bust patterns are only identifiable in hindsight."

Chip stocks still in correction territory

As mentioned, a series of investment firms and analysts have recently raised their forecast for the S&P 500 at the end of the current year one after another, with most of them focusing on the 8,000-point area. The latest to do so is veteran strategist Ed Yardeni, who provided the most optimistic forecast on Wall Street so far and expects the S&P 500 to reach 8,400 points by the end of the year — an upside of over 8% compared to its current level.

"We have never seen earnings expectations rise so rapidly for the current year and the years ahead as they have since mid-2025," Yardeni said. "The result has been a meltup in the stock market to all-time highs." Yardeni added that "we think any pullback (and even a crash) will be a buying opportunity and will not lead to a recession or a bear market, similar to the dot-com bubble in 1999-2000... We remain with the target of 10,000 points by the end of 2029, but we will likely raise it if the roaring 2020s continue to go in our favor."

Since the beginning of the year, the tech-heavy Nasdaq has added over 14% to its value. Chip stocks, which climbed by hundreds of percent in the last year and are considered the most identified with the AI fever, have suffered significant pressure in recent weeks; the Philadelphia Semiconductor Index (SOX) has fallen by about 12% since the peak it recorded in June and is now in correction territory (a decline of at least 10% from the peak), after spending some time in bear market territory (a decline of 20% from the peak).