The S&P 500 will soar another 26 percent by the end of next year as the Fed cuts interest rates more than expected, research firms say.

• Stocks will bounce higher by the end of next year, says Capital Economics.

• The fact that no current stock bubble is anywhere near the levels of 1929 and 2000 suggests that there is more upside to come.

• Meanwhile, the firm said in a recent report that the Fed may cut rates more than investors expect.

According to Capital Economics, the S&P 500 will continue to soar until at least 2026, as the stock market rally doesn't look like it's over and the Fed is poised to cut interest rates more than expected.

Economists at the research firm predict that the S&P 500 will soar to 6,500 by the end of 2025, which would represent a 26% rise from current levels.

Contrary to the views of more bearish commentators, some market gurus are warning that the stock market is on the verge of a correction as the S&P 500 mirrors other historic bubbles.

But Capital Economics says stocks aren't as highly valued as they used to be. Simler's S&P 500 excess CAPE yield, which shows the valuation of stocks relative to bonds, still hasn't reached the levels seen in 1929 and during the dot-com bubble, suggesting that stocks may be "going up even more."

"We expect 'risky' assets, particularly equities, to continue to outperform 'safe' assets over the next few years as the stock market bubble continues to inflate," the economists said in a report Thursday. 'Risky' assets, particularly equities, will continue to outperform 'safe' assets over the next few years.

Meanwhile, the Fed is expected to cut interest rates soon, and the cut could be much larger than the market expects, the firm said. According to the firm's estimates, the Fed could cut rates for the first time in June and eventually cut rates by 200 basis points by mid-2025, more than the market expects.

"With the economy holding up well, the Fed is likely to remain unchanged through July. Despite this, our rate cut expectations remain higher than investors' expectations," the economist added.

For more than a year, the market has been waiting for a rate cut, as lower rates would ease the financial environment and boost risky assets like stocks. Fed officials expect to cut rates by 75 basis points in 2024. Meanwhile, according to the CME FedWatch tool, investors see a 65% chance that the first rate cut will come in June.

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