The AI race has pushed the market to record highs this year, sparking investor concerns of a pullback. Capital Economics Group chief economist Neil Shearing joins Morning Brief to break down why he thinks there's more room for growth amid continued demand for the technology.

"Normally, what happens during these big breakthrough technologies is that markets try to capture the benefits of that growth ahead of them actually crystallizing in the real economy. So you tend to get hype, you tend to get bubbles forming — we obviously had that in the dotcom boom. And our view is that the same thing is playing out with AI, and so there's a debate about whether or not we're in an AI bubble. How far does that have to inflate? If you look at history, it has a lot further to inflate, hence our view that the S&P 500 (^GSPC) is going all the way to 7,000 potentially by the end of next year," Shearing explains.

He notes that a major difference between the AI boom and the dotcom boom lies in the fact that the hype and revenues generated by AI have occurred in established companies like the Magnificent Seven. In the dotcom boom, he explains, "a lot of it was about small, scrappy startups where the technology was being developed. So we've got large, listed companies developing this technology and actually, it's generating revenue as well." As the hype around AI continues to build, Shearing believes that margins will continue to expand.

How and when the AI bubble may burst, however, is a lot harder to predict: "We can start to think about how far it might inflate by looking at things like what do we think the future path of earnings in these companies might be, and what tends to happen to earnings multiples during bubbles. That can anchor a view as to how far this bubble might inflate." Shearing believes the S&P 500 has about another two years before the AI bubble pops, and its breaking point could be attributed to anything from an earnings miss to an economic downturn.

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This post was written by Melanie Riehl