Capital Economics: The S&P 500 will continue to rise through at least 2026

The uptrend in the US stock market does not appear to be over, the S&P 500 will continue to rise through at least 2026 and the Federal Reserve will cut interest rates more than markets currently expect, the team at Capital Economics believes , according to Business Insider.

The economists of the research firm anticipate that the S&P 500 will climb to 6,500 points by the end of 2025, which means an increase of about 25% compared to the level at the end of last week, the American publication also mentions.

It is a contrary opinion to that of many analysts who have a pessimistic outlook and believe that the market is showing signs of a speculative bubble. But Capital Economics believes that stocks are not as overvalued as they were in the periods preceding significant falls. Shiller's S&P 500 Excess CAPE index, which shows the valuation of stocks relative to bonds, is still not at the levels seen during the 1929 bubble and the dot-com bubble, a sign that stocks may still rise.

"We expect "risky' assets, particularly equities, to continue to outperform "safe' assets over the next two years as the bubble continues to inflate," the economists wrote in a note.

According to Capital Economics, the Federal Reserve will cut interest rates more severely than markets currently expect. The first reduction is likely to be made in June, and by mid-2025 the US central bank will cut 200 basis points, according to estimates by the economic research firm.

"The economy is holding up well," the Capital Economics team wrote. "We expect more interest rate cuts than investors".

Markets have been waiting for the rate cut for more than a year as lower rates ease financial conditions, which can boost the price of risky assets. For this year, Fed officials anticipate cutting interest rates by 75 basis points, writes Business Insider. Traders currently see a 61 percent chance the Fed will cut interest rates by 25 basis points at the June meeting, according to the CME FedWatch Tool.