It looks like we’re heading for another positive year for the stock market, with just 18 full weeks left until 2027. Where’s the time going?!
Year to date, the FTSE 100 and S&P 500 are up 8.5% and 11.1%, respectively, while the tech-heavy Nasdaq-100 is beating both on 14.4%. All before dividends.
The S&P 500 is on course to generate a double-digit return in seven out of the last eight years. Wow.
However, digging deeper, it has been AI-related hardware, energy and hyperscalers driving the S&P 500 in 2026. And history tells us that nearly every major technological paradigm shift over the past 200 years has followed a boom-bust cycle.
In other words, there’s usually intense speculative exuberance, over-investment, and an eventual market crash. It happened with the internet, and now there’s AI.
Might there be a crash in 2027?
The case for a meltdown
I don’t think one can be ruled out. After all, the cloud computing giants are spending eye-watering sums on the AI buildout, which is fuelling record profits at AI-related hardware firms and chipmakers.
But what if these hyperscalers all started aggressively reining in AI capital expenditure one after the other? Nvidia, Broadcom, Micron, and AMD make up a decent chunk of the S&P 500 now. There could be chaos.
Also, AI lab Anthropic is readying itself for an IPO before 2027. The valuation could reportedly top $2trn, a record sum.
Might historians look back and see this IPO as the bull market top? An AI bubble-popping event? It’s possible.
The case against
On the other hand, history can be used to think that a crash won’t happen next year. That’s because we’ve got the US mid-term elections coming up in November.
And according to asset manager Hartford Funds, since 1950, the S&P 500 has delivered an average return of 15.17% in the year following mid-term elections, compared with just 7.3% on average across the other three years.
Some put this down to the incumbent government prioritising pro-growth economic policies as the presidential elections get closer. This makes sense. As Bill Clinton’s campaign strategist once remarked: “It’s the economy, stupid“.
According to this data then, 2027 might actually be a bumper year.
Recovery play
Regardless of where the market’s heading, one stock that looks attractive to me is Diageo (LSE:DGE). This is the FTSE 100 drinks behemoth behind timeless brands like Johnnie Walker, Tanqueray, Guinness, and Smirnoff.
The stock is down 51% over five years, reflecting the cost-of-living crisis and changes in drinking habits among Gen Z. Both of these things are ongoing challenges for the business, especially in North America.
However, I’m bullish on the recovery prospects with turnaround specialist Dave Lewis as the still-new CEO. He’s set out plans to save $1bn in costs, improve the company’s operating framework, and sell non-core assets to strengthen the balance sheet.
Crucially, Diageo’s now aiming for mid-single-digit growth in organic operating profit over the medium term, with earnings per share ahead of that. The firm will focus resources on fast-growing categories, particularly Guinness and canned cocktails.
Looking ahead, I believe share buybacks are possible while the stock is cheap and pays a 2.7% dividend yield. With all the ingredients in place for an eventual turnaround, I think Diageo is worth considering as a recovery play.
Should you invest £5,000 in Diageo Plc right now?
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Ben McPoland owns shares of Diageo.
