Investing.com -- Capital Economics Chief Economic Adviser John Higgins said in a note Wednesday that a surge in foreign buying of U.S. equities could be another warning sign for the S&P 500, noting that similar surges preceded the bursting of the dotcom bubble, the global financial crisis, and the 2022 market drawdown.

While foreigners naturally tend to accumulate U.S. financial assets given the country's persistent current account deficit, which has produced net liabilities exceeding $21 trillion as of the end of the first quarter, Capital Economics said the composition of these holdings has shifted meaningfully.

Two decades ago, foreign portfolio investment liabilities were mainly debt securities, while today, they are mostly equities. Higgins notes that foreigners' ownership share of U.S. equities has surged to more than 21%, up from just over 6% in 1997.

Capital Economics said the historical evidence shows that "substantial increases in foreigners' net purchases of US equities have coincided with sizeable rallies in the S&P 500 that have subsequently reversed," pointing to the dotcom bubble, the GFC, and the 2022 pullback as examples.

The firm noted the current increase in foreign buying accompanying the stock market's recent surge "has been much larger than the increases in foreigners' net purchases of US equities during the rallies of those earlier episodes."

Capital Economics cautioned that this AI-driven buying trend "is likely to reverse if and when the bubble in AI bursts," which would likely coincide with U.S. equities underperforming global peers.

On currency implications, the firm said how the dollar would fare in such a scenario "would probably depend heavily on how much, if at all, the Fed eased monetary policy compared to other central banks."