Macroeconomists at Capital Economics have re-emerged with a cautious yet caffeinated update. They expect the S&P 500 to climb in the near term but maintain a cautious stance on its longer-term trajectory.

According to their latest report, there is little standing in the way of further near-term gains, unless there are any surprises related to tariffs or corporate earnings. Analysts are pinning their hopes on the much-hyped "One Big Beautiful Bill" that just bulldozed its way through the legislative maze. The report says the bill is supposedly set to revitalize the US economy.

Despite concerns about the long-term state of public finances, the bill deftly avoids fiscal pitfalls. Tax breaks have been extended, and the debt ceiling has been raised by a whopping $5 trillion. 

According to Capital Economics, there is no longer any reason to panic about another debt-ceiling showdown, so the Treasury market can finally exhale. After all, $5 trillion is not pocket change.

Still, another twist looms on the horizon: long-term Treasury yields. A surge in yields could easily sour the mood across markets, unless it triggers a meaningful reduction in the equity risk premium. So far, that premium remains low by historical standards, but it is still higher than during the carefree days before the dot-com bubble burst. 

The cherry on top is artificial intelligence. According to analysts, a fresh wave of AI-driven euphoria could continue to push markets upward and reduce the risk premium even more. The days when merely mentioning "AI" sparked a rally might not be over.

As for corporate earnings, things remain relatively stable. Even with the occasional jitter in macro data, Capital Economics has not rushed to revise its May forecasts. The guiding principle appears to be: when uncertainty reigns, patience prevails

Against this backdrop, Capital Economics is holding firm on its year-end 2025 forecast for the S&P 500 at a modest 6,250 points, citing persistent risks, including trade tariffs and the uncertainties of earnings season.

By the end of 2026, however, analysts project that the index could hit a respectable 7,000 points. That said, their long-term optimism comes with a caveat: the current wave of AI enthusiasm may eventually lose momentum.