AI bubble bursts? Fitch warns market correction could tip US into recession

The artificial intelligence boom has become a key engine of the US economy. But a sharp reversal in AI investment and equity markets could turn that strength into a major global economic shock, according to Fitch Ratings.

In its September Global Economic Outlook, Fitch modelled a downside scenario involving a 35 per cent decline in US equity prices, a 15 per cent fall in non-US equities and an additional confidence-driven shock to US private investment.

The result could be severe: US GDP could contract 0.6 per cent in 2027, pushing the world’s largest economy into recession, while global growth could fall below 1 per cent.

Why the AI boom matters

Fitch said the AI boom is currently supporting the US economy through rapid growth in technology capital expenditure. Rising equity-market wealth is also indirectly supporting consumer spending.

However, the rating agency cautioned that some equity valuations appear highly elevated, while the future profits expected from AI investments remain uncertain.

A sharp correction in share prices, combined with companies cutting spending on AI infrastructure and technology, could therefore hit investment as well as consumer demand.

Global economy could feel the shock

The fallout would not be limited to the US. Under Fitch’s downside scenario, growth in both the eurozone and China would be 0.8 per centage points below their baseline forecasts in 2027.

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Canada and Mexico could face some of the biggest effects because of their strong trade links with the US. Economies with large information technology and semiconductor industries, including South Korea, could also come under pressure.

The shock would generate strong disinflationary pressure, prompting the US Federal Reserve to cut interest rates aggressively. Fitch estimates 325 basis points of rate cuts under the scenario.

Fitch’s base case remains resilient

The AI stress scenario is not Fitch’s baseline forecast. The agency expects the global economy to remain resilient in 2026 and has raised its global GDP growth forecast to 2.6 per cent from 2.4 per cent earlier. It has retained its 2027 and 2028 forecasts at 2.5 per cent and 2.6 per cent, respectively.

Fitch has also raised its US growth forecasts for both 2026 and 2027 to 2.1 per cent.

The warning ultimately highlights the risks surrounding the sustainability of the AI investment cycle. If AI spending and elevated equity valuations remain intact, they can continue supporting growth. But a sharp reversal could send shockwaves from Wall Street through the US economy and into global markets.