Wall Street analysts are describing the current moment as “crazy days” and “silly season” even as one of its most bearish forecasters warns of a “late-stage” AI bubble—and now the Federal Reserve may be about to do the one thing that has historically ended booms like this, over the objections of two of its own governors.

London-based forecaster Capital Economics has spent the past several months building the most detailed public case yet that the AI trade is a “late-stage bubble.” In a September 10 report, senior markets economist James Reilly screened eight categories of market indicators and found most sitting at or near levels that have historically preceded major peaks—a warning serious enough that the firm now forecasts the S&P 500 will start cracking next year, eventually falling by at least 30% from its high, one of the seven worst crashes in the past century.

The market’s own behavior lately makes that warning easier to believe and harder to parse at the same time. On July 30, Microsoft’s market value rose by $450 billion in a single day. The next day, Apple’s fell by $360 billion while Amazon gained $388 billion and Meta dropped $102 billion the day before. All four moves were large enough that they prompted Owen Lamont, a behavioral economist and portfolio manager at Acadian Asset Management, to look for real-world comparisons to make them legible. Microsoft’s one-day gain, he wrote, was equivalent to “1.04 Houstons” in assessed property value. Apple’s loss matched 3.6 Hurricane Sandys.

Lamont posted on his Owenomics blog about “Crazy days in the stock market.” His dispersion index—a measure of how wildly individual stocks are swinging even when the overall market looks calm—hit its third-highest reading in more than 2,850 trading days, trailing only “vaccine Monday” in November 2020 and the DeepSeek shock of January 2025.

This morning, another corner of Wall Street reached for a different label. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, told clients they were entering “Wall Street’s proverbial silly season”—the historically volatile September-October stretch, worsened this year by a midterm-election cycle. Her conclusion was to stay calm: rising rates, oil-market stress and policy noise are real, she wrote, but “markets appear to be pricing them in clear-eyed fashion.”

Morgan Stanley shrugged off the bubble-bursting concerns, with its Global Investment Committee reiterating a year-end S&P 500 target of 8,000 and a mid-2027 target of 8,300—bullish territory, not a bust. Shalett’s argument leans on the idea that markets have already absorbed some of the adjustment that bears are demanding: the S&P 500’s forward price-to-earnings ratio has fallen from 22.5x in January to about 19.5x now, without major equity losses, largely because earnings growth above 30% year-over-year has cushioned the compression. Even on rates, her committee argues the AI build-out “is mostly rate-insensitive,” meaning a Fed hike or two is unlikely to actually stop hyperscaler capital spending, whatever it does to bond yields in the short run.

The big question is about this coming Wednesday, when the Federal Reserve is expected to raise interest rates for the first time since July 2023—a move that effectively ended the last comparable tech boom, 26 years ago. Economists at UBS expect the vote to split 10-2, with Governors Christopher Waller and Michelle Bowman dissenting in favor of holding steady, meaning that if it happens, it happens over real internal dissent.

The Fed question

Fed Chair Kevin Warsh has spent his short tenure avoiding forward guidance on purpose—”not well suited to the current economic moment,” he said at his first press conference in June. But at his Jackson Hole speech on August 28, Warsh dropped the ambiguity, walking through what UBS economists counted as 20 separate hawkish observations. “I would be hard pressed to describe broad financial conditions as restrictive,” he said.

He argued that inflation, not the labor market, should be the Fed’s overriding concern, and offered a line UBS expects him to repeat “almost verbatim” at Wednesday’s press conference: “There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank.” Taken as a whole, UBS’ economists wrote, the framework Warsh laid out “would arguably make him the most hawkish Chairman since the Banking Act of 1933 created the FOMC”—though they immediately noted the comparison is imperfect, since Warsh inherited far lower inflation and better-anchored expectations than Paul Volcker did in 1979.

Markets reacted to Jackson Hole almost instantly: the odds of a September rate hike, as tracked by CME’s FedWatch tool, jumped from roughly 35% to nearly 60% within days. A hotter-than-expected August inflation report on September 11 pushed those odds above 85%. Heading into the Fed’s two-day meeting that concludes Wednesday, traders are pricing a quarter-point hike, to a range of 3.75% to 4%, as close to a done deal, with UBS’ economists expecting risks tilted toward a second hike by December.

What makes the coming decision genuinely strange, according to UBS, is the mismatch between the data and the outcome. Core CPI inflation fell to 2.4% in August, a new post-pandemic low. UBS expects the Fed’s own committee to simultaneously revise its inflation projections down and its rate-hike projections up in this week’s Summary of Economic Projections—something UBS says has never happened before in the history of the Fed’s forecasting exercise. UBS’s own verdict: “That is really, really odd, indeed unique.” Writing on the same day, David Kelly, the chief global strategist for JP Morgan Asset Management, argued that the Fed had painted itself “into a rate-hiking corner,” with it being an open question whether the economy is actually running too hot.

UBS’s economists also took a hard look at the statistic Warsh used at Jackson Hole to justify his alarm—that 54% of items in the Fed’s preferred inflation basket have shown price increases above 3% over the past year. Replicating the calculation themselves, UBS found the number holds up, but concluded it’s “close to the long-run average,” and that the 3% cutoff Warsh chose appears to have been picked because it “worked nicely as a rhetorical device.” Much of what’s pushing the number up, they found, comes from volatile items like gasoline, airfares and portfolio-management fees that could easily swing back down within a year.

Warsh is doing this over clear political resistance; President Trump has made plain that he wants rates to be lower, and Warsh’s hawkishness has put him publicly at odds with the White House. Jon Hilsenrath recently told Fortune that a Shakespearean drama of sorts was playing out between Warsh, Treasury Secretary Scott Bessent and their mutual mentor, Stanley Druckenmiller, whose op-ed in the Wall Street Journal has raised more attention for being composed with AI than for what it says about the tug-of-war between the White House and the Central Bank.

That Warsh appears willing to hike anyway, even against likely dissent from two of his own governors and even as headline inflation data improve, suggests he is prioritizing a big-picture inflation-credibility argument over both short-term market comfort and the numbers immediately in front of him—precisely the posture that preceded the last time a technology-driven bubble met a tightening Fed.

The precedent that Capital Economics keeps returning to

Capital Economics has pointed directly at the dot-com collapse as its template for what happens next — and monetary policy is central to that comparison. Between June 1999 and May 2000, the Fed raised its policy rate from 4.75% to 6.5% to cool an overheating economy. The S&P 500 fell by nearly half afterward, in a decline that dragged on for roughly two and a half years.

The analysis firm has been recently forecasting a smaller, shorter AI-bubble unwind than the dot-com crash specifically because it did not expect the Fed to tighten this cycle the way it did in 1999 and 2000. But if Warsh hikes Wednesday and signals more increases ahead, it would mark the first meaningful tightening cycle since the AI trade took off in 2023.

The rest of the firm’s case doesn’t need help from the Fed to look concerning on its own. Reilly’s September 10 report found consensus estimates for S&P 500 earnings growth now matching dot-com-era peaks, concentrated overwhelmingly in technology and semiconductor names. The combined free cash flow of the four largest hyperscalers is projected to turn negative in 2027 as capital spending balloons, even as their bond issuance has more than doubled over the past year. And a fresh wave of equity issuance — the clearest signal, in Reilly’s view—is already visible in Anthropic’s planned initial public offering this fall, which arrives amid one of its own researchers publicly declaring that “we really do earnestly believe AI could kill all humans.”

Owen Lamont, in a blog post dryly titled “IPOs of doom,” called that reasoning “ESG on steroids: Extinction, Singularity, Guardrails,” and noted that the last time an IPO became a symbol of excess—Pets.com, in February 2000—it came to be “widely seen as marking the beginning of the collapse of the tech stock bubble.” He concluded, “Let’s hope that future historians do not look back at the Anthropic IPO and see it as marking the beginning of the collapse of human civilization.”

For this story, Fortune journalists used generative AI as a research tool. An editor verified the accuracy of the information before publishing.

This story was originally featured on Fortune.com