Bloomberg reports:
The US stock market is poised to be kept on edge next year as investors are caught between fear of missing out on the artificial-intelligence rally and concern that it’s a bubble just waiting to burst.
Big selloffs and quick reversals have been a feature of stock markets for the past 18 months. That trend is likely to continue heading into 2026, with some strategists anticipating that AI will follow the boom-and-bust cycle of past technological revolutions.
The tech companies at the center of the AI investment boom carry an outsized influence. While the divergence between the group and the rest of the S&P 500 (^GSPC) has helped dampen realized volatility across the market in 2025 as gains in tech cancel out declines elsewhere, investors are alert for stumbles in chip names to spread. That would cause volatility gauges such as the Cboe Volatility Index to surge.
“2025 has generally been a year of rotation and narrow leadership, rather than one of broad risk-on versus risk-off,” said Kieran Diamond, derivatives strategist at UBS Group AG. “This has helped to drag implied correlation levels down to record lows, which in turn leaves the VIX at risk of ongoing outsized spikes whenever we see macro drivers taking over again.”
The scale of the stock-price runup has made angst about a bubble the top concern among fund managers, a recent Bank of America Corp. (BAC) survey found. But another is the classic risk of missing out if it still has more room to run — potentially punishing anyone who pulls back too early.
The strategists expect equity volatility to be supported in 2026 primarily because asset bubbles tend to get more unstable as they inflate. As a result, they say investors should expect occasional declines surpassing 10%, but with record-fast snapbacks as traders realize the bubble isn’t popping yet.