The extraordinary rise of artificial intelligence and the stock market boom that has come with it have drawn many comparisons with the dot-com bubble of the late 1990s.

The long and painful unwinding of that technology-driven rally saw the

SP 500 fall 49 per cent from its peak in March 2000 to the trough in October 2002. Information technology and communication services fell 82 per cent and 74 per cent, respectively in the same period.

Recent selloffs in the tech sector has raised alarms that once again the end is nigh, but Capital Economics is not convinced. It thinks that the “AI bubble” has another year or so to inflate.

If the rally continues and the S&P 500 hits 8,000 by the end of 2026, as Capital predicts, then drops of at least 30 per cent in the index and 60 per cent in the big-tech sectors combined are possible, said John Higgins, Capital’s chief markets economist.

If that sounds like a lot, Higgins points out that the S&P 500 would be 25 per cent lower today if not for the AI boom, and that is not counting the further rally Capital is predicting for 2026.

The correction Capital envisions would be slightly smaller and significantly shorter than the dot-com meltdown.

One thing that would be missing is a recession , which followed the market crash in 2001 and was largely brought on by

Federal Reserve interest rate hikes. Between 1995 and its peak in March 2000, the Nasdaq rose 400 per cent in the frenzy for internet stocks and tech companies. Concerned about inflation, the Fed started to raise rates in 1999 and in less than a year had hiked them 1.5 percentage points.

This time around it is far more likely that the Fed will cut rather than raise rates and Capital is not expecting a recession.

There will be collateral damage. While defensive sectors such as consumer staples should hold up well, utilities, which have been boosted by the huge power demands of AI data centres, will fare less well, said Capital.

On the bright side, as the S&P 500 becomes less concentrated on tech, other stocks could climb higher, as they did after the dot-com crash.

But what happens to big tech? Capital said five years after the crash in 2000 these sectors recovered, but did not retain their former glory over other cyclical stocks.

“Something similar might happen again, as the boost to productivity from the AI revolution started to show up in more parts of the economy,” said Higgins.

Capital may be right about the rally having further to run. This morning, tech stocks were once again leading gains after last week’s selloff.

But the economists did add this caution: “given the pullback in the stock market, it isn’t out of the question that the bubble is starting to burst now.”

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Canadian consumer spending slowed to the weakest pace in a year in the third quarter amid uncertainty about the economy and tariffs.

Retail sales grew 0.2 per cent after rising 0.3 per cent in the previous quarter, data from Statistics Canada showed Friday. September sales fell 0.7 per cent while an early estimate showed October sales as flat.

“Canadian retail sales continue a holding pattern as support from lower interest rates faces headwinds from trade uncertainty,” said Shelly Kaushik, senior economist at Bank of Montreal.

“The bigger picture is one of mild economic growth that will do little to move the needle for the Bank of Canada heading into its December meeting.”

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The recent bout of punishing selloffs have investors questioning whether this is the end of the market party. Investing pro Peter Hodson takes a look at look at five signs of a market correction and where we might stand now.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

McLister on mortgages

Read on Want to learn more about mortgages? Mortgage strategist Robert McLister’s

Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his

Financial Post on YouTube

mortgage rate page for Canada’s lowest national mortgage rates, updated daily. Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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