Volatility suggests AI is not in a bubble - at least not yet, says Bank of America

By Steve Goldstein

For all the talk of artificial-intelligence stocks being in a bubble, Bank of America's derivatives strategists say there's one missing element.

In the last nine asset bubbles over the last 100 years - from the Dow in 1929 to the Ark Innovation ETF rally of 2021 - volatility has consistently risen as the bubble developed.

That is not the case now. On a one-month measure, realized volatility in the S&P 500 last week fell to 8.5%, the lowest of the year. The S&P 500 has gone 18 days without a move of at least 1%.

The S&P 500 SPX finished Monday at its 10th record high of the year, a period in which it's risen 7%. The Nasdaq Composite COMP notched its 12th record high.

"Vol rising with spot has been a signature of asset bubbles historically, but such price action has faded in the same tech megacaps that exhibited spot-up, vol-up tendencies in Q1 2024," say strategists led by Benjamin Bowler.

They presented data showing the rise in one-month realized volatility from start to peak for historical bubbles.

In the largest stocks, the rally over the past month in stocks including Nvidia (NVDA) and Apple (AAPL) has not been accompanied by a rise in volatility. But in the first quarter of 2024, those megacap tech stocks were rising with volatility.

Granted, the strategists said the late 1990s tech bubble also saw periods of relative calm. They take that to mean that a bubble isn't impossible, just not imminent.

And they do see parallels in the rise of companies including CoreWeave (CRWV) and Circle Internet Group (CRCL) to the post-IPO dynamics of the dot-com bubble in companies such as Akamai Technologies (AKAM). The BofA strategists also note the "signs of froth" in Robinhood Markets (HOOD) and Coinbase Global (COIN).

"In our view, the frothy signs in these other pockets indicates that the market still holds the potential energy to continue inflating the AI bubble in its previously frenzied fashion, but that the focus has shifted away from the megacaps for now," they say. "While risk-off/risk-on cycles are expected in a market dominated by sentiment and momentum, bubbles can take years to unfold and we could still be in the early stages. If history is any guide, one would expect much stronger returns across the broader market and vol rising more strongly with price in the final stages."

-Steve Goldstein

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07-22-25 0534ET