By Jamie Chisholm
High valuations leave stocks vulnerable to a big tech sell-off, according to BCA Research
There's still a lot riding on AI.
The final full week of trading in 2025 is upon us. And as attention increasingly turns to next year it's fair to say that most analysts' base cases for equities are pretty bullish, with a median prediction of 7,500 for the S&amp;P 500 SPX by the end of 2026, according to MarketWatch calculations.
But not all observers are so chipper. Indeed, the headline of the latest note from the editorial board at BCA Research, led by chief global strategist Peter Berezin, encapsulates their caution: &#34;Return of Nasdog&#34;.
In other words, it's the big technology companies of the Nasdaq that will prove a particular drag on the stock market in 2026.
Berezin and colleagues present their analysis in the form of a time-traveling review from early January 2027, and so we will adhere to their use of the past tense. Before we get into that, we should note that Berezin in July predicted U.S recession concerns meant investors should be underweight stocks as he earlier called for a 4,450 finish for the S&amp;P 500 this year.
Their main takeaway is that the AI boom turned to bust, while economic activity slowed sharply. Let's start with the former. BCA says that the problem with AI-based over-spending should have been clear, with investment in tech and software reaching 4.4% of U.S. GDP in 2025, nearly as high as the dotcom bubble.
&#34;Given that AI assets typically depreciate at a rate of around 20% per year, this implied that the hyperscalers were facing an annual depreciation expense of $400 billion - more than their combined profits in 2025,&#34; says BCA.
The assumption that AI would significantly boost tech companies' profits started to look very shaky at the start of 2026, as AI adoption rates moderated.
The technology enjoyed few network effects, limited economies of scale because of power and infrastructure needs, and became &#34;an extremely commoditized, capital-intensive industry where first-mover advantage is not particularly important,&#34; says BCA.
The cracking of the bullish AI-narrative hit a vulnerable stock market, where the S&amp;P 500 going into the start of 2026 was trading on  22.6 times forward earnings, well above the median of 18, BCA notes.
Source: BCA Research.
BCA accepts that valuations are not a great timing tool. But they add that &#34;valuations are useful for is telling you how much stocks can rise or fall when a regime shift occurs.&#34;
And just like when the 2001 recession was more the result of a stock market crash than the cause of one, so the market downturn at the start of 2026 impacted the economy as the wealth effect went into reverse.
BCA says it's estimated that every additional dollar in equity wealth raises consumption by 3 to 5 cents. With U.S. households holding $65 trillion of stock market wealth, a 10% drop in the market may cause a reduction of consumption demand representing about 0.8% of GDP.
Cracks in the labor market worsened, credit delinquency rates spiked and housing continued to struggle. Benefits from the One Big Beautiful Bill Act were largely offset by what BCA calls &#34;tariff drag.&#34;
Early in 2026, the stock market's losses were marginal as investors rotated from into non-tech and from growth to value. But BCA notes that &#34;the wheels came off for almost every part of the stock market in the second half of 2026&#34;, as AI capex dropped sharply and the unemployment rate began to rise quickly.
As advertisers trimmed budgets amid  falling consumer discretionary spending, Meta (META) and Alphabet's Google (GOOGL) further reined in investments plans, hitting Nvidia (NVDA) and other stocks reliant on AI capex.
The upshot of all this was that the S&amp;P 500 ended 2026 at 5,280, down 23% for the year, and the Nasdaq Composite lost 31%. As the dollar sagged the Japanese yen rallied, touching 115 yen per dollar by year end. Gold hit a fresh record high but bitcoin finished at $50,000, hurt in part by a weakened President Donald Trump after Republican's took a beating in the midterm elections.
Meanwhile, mounting concerns about a U.S. recession caused the Fed to increase the pace of interest rate cuts in the second half of 2026, pushing fed funds to 2.25% and the 10-year Treasury yield to 3.1% by December.
Consequently, the best trade for 2026, says BCA was to be short the Nasdaq 100 via the Invesco QQQ Trust Series I ETF QQQ and long iShares 20+ Year Treasury Bond ETF TLT, for a return of 52%.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is lower, while oil prices (CL.1) fall and gold futures (GC00) are trading around $4,371 an ounce.
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The buzz
The Empire State manufacturing index fell from 18.7 in November to minus 3.9 in December, against expectations of 10.
Other U.S. economic data due Monday includes home builder confidence for December at 10:00 a.m.
Federal Reserve officials speaking on Monday include governor Stephen Miran at 9:30 a.m. and New York Fed President John Williams at 10:30 a.m.
Kevin Hassett, President Donald Trump's top economic adviser, and one of the two front-runners to be the next Fed chair, said that he would not simply push Trump's agenda if he was chosen for the role.
Elon Musk's SpaceX has started the process to select bankers for its IPO, according to the Wall Street Journal.
ServiceNow (NOW) is in talks to acquire cybersecurity startup Armis in potential $7 billion deal, according to Bloomberg.
Roomba maker iRobot (IRBT) filed for bankruptcy and will go private.
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The chart
Those concerned that the stock market is vulnerable to a sharp pullback may tap their screens and tut at the chart from Torsten Slok, Apollo's chief economist. It shows that hedge fund leverage is rising sharply as &#34;prime brokerage and repo borrowings have essentially doubled over the past two years,&#34; Slok says.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
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-Jamie Chisholm
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
12-15-25 0836ET

NVDA

<p>BCA Research predicts the AI boom will bust in 2026, impacting tech stocks and the broader market. High valuations and AI commoditization will lead to a downturn, with the S&P 500 dropping 23% and Nasdaq losing 31%. The best trade is shorting Nasdaq 100 and going long on Treasury bonds for a 52% return. Concerns about a U.S. recession will prompt Fed rate cuts.</p>

- BCA Research warns that high stock valuations, particularly in tech, may lead to a significant sell-off in 2026, predicting a 23% decline in the S&P 500.  
- The report highlights that the AI boom has faltered, with tech investments reaching unsustainable levels, leading to a sharp drop in capital expenditures and rising unemployment.  
- As a result, the Nasdaq Composite is expected to lose 31%, while the Federal Reserve may accelerate interest rate cuts in response to growing recession concerns.

The AI boom will turn to bust in 2026, says this forecaster who offers his trade of the year