Bank of America noted that the recent anomaly of a simultaneous rise in the S&P 500 Index and the VIX Index in the US stock market is a typical signal of asset bubble formation. Large technology stocks have experienced significant volatility, with individual stock fragility surging to levels even surpassing those during the dot-com bubble era. However, the VIX remains near its historical median, and realized volatility has been relatively moderate, indicating that the AI-driven bubble is still in its early stages, leaving room for further upside in both the market and volatility.
Bank of America noted that the recent phenomenon of "rising stock prices alongside increasing volatility" in the market represents an early sign of an asset bubble. However, this bubble driven by artificial intelligence (AI) may still have a long way to go before reaching its peak.
On November 5, BofA Global Research noted in its latest research report that the U.S. stock market has recently experienced frequent occurrences of $VIX (LIST91327.US)$ futures and $S&P 500 Index (.SPX.US)$ rising simultaneously. This combination of 'rising stock prices and increasing volatility' has historically been a hallmark characteristic of asset bubbles.
However, the team led by strategist Benjamin Bowler noted that unlike the late stages of historical bubbles, the current VIX index remains near its historical median, and realized volatility is relatively moderate. This indicates that both the market and volatility itself still have room for further upside.
The analysis suggests that the primary risk (pain trade) in the current market lies in missing out on the upward movement rather than experiencing a deep correction. Nevertheless, given the hawkish signals from the Federal Reserve and macroeconomic uncertainties, the risk of a pullback remains. Therefore, Bank of America recommends that investors should not exit the market entirely but instead participate in subsequent rallies through asymmetric tools such as options to gain leveraged returns while managing risks.
"Rising Stock Prices and Volatility": A Clear Signal of a Bubble
The report states that the calm price movements observed during the summer appear to have been disrupted. A notable change is the increasing frequency of simultaneous rises in the S&P 500 Index and VIX futures in the U.S. stock market.
This dynamic runs contrary to the typical negative correlation between the two. Historically, this "spot-up, vol-up" pattern has been a hallmark signal during the formation of asset bubbles.
Meanwhile, vulnerabilities at the individual stock level are intensifying, especially among large-cap technology stocks. The report cites the recent earnings season as an example:
$Meta Platforms (META.US)$ On October 30, the stock price plummeted by 11.3%, with its single-day volatility being approximately 8.3 times its historical realized volatility.
$Amazon (AMZN.US)$ On October 31, it surged by 9.6%, with the volatility being approximately 5.5 times its historical realized volatility.
The report noted that these sharp fluctuations far exceeded the options market's prior expectations. Data shows that since the beginning of 2025, the frequency and magnitude of significant swings in U.S. tech stocks (daily moves exceeding three standard deviations) have reached historic highs, even surpassing levels seen during the dot-com bubble. This suggests that despite the steady rise of indices, underlying risks at the individual stock level have been brewing.
Bank of America explicitly stated in its report that such anomalies are hallmark characteristics of a growing market bubble, a phenomenon repeatedly observed in history. When market sentiment is high, investors chase upward momentum while simultaneously buying options for hedging or speculation, which can lead to this positive correlation.
Why is it said that the bubble is still in its early stages?
Despite signs of a bubble emerging, Bank of America emphasized that we may still be in the early stages of the bubble. The primary evidence comes from several key volatility indicators:
VIX index levels remain not extreme: Although the bottom of the VIX has risen from around 12 in 2024 to approximately 15, the current level is still close to its long-term median of 17.60. This is far from the situation during the late stages of the dot-com bubble when the VIX surged above 40.
Realized volatility remains relatively contained: The report specifically pointed out that the Nasdaq 100 Index’s (NDX) one-month realized volatility is still "quite mild" compared to levels seen at the peak of the dot-com bubble. During the bubble’s apex in late 1999, the NDX’s average realized volatility was as high as 93%, whereas the current level remains significantly lower.
Overall, these "moderate" indicators suggest that the current AI bubble may still have considerable room for expansion before the market reaches the peak of "irrational exuberance" and eventually bursts. As stated in the bank's research report:
"Although the simultaneous rise in stock prices and volatility has historically been a hallmark of market bubbles... the current level of realized volatility in the index remains moderate (especially when compared to the dot-com bubble period), indicating that there may still be further upside potential for both stock prices and volatility before the eventual collapse. This aligns with our broader framework analysis of bubbles."
Based on the judgment that the 'AI bubble will continue to expand,' and considering the persistent risk of a pullback, Bank of America recommended in its report that investors adopt asymmetric positioning through options. The specific strategies include:
Selling VIX put options to construct S&P 500 call spreads at zero cost, leveraging the solid floor of the VIX to reduce the cost of capturing upside gains;
And from a longer-term perspective, buying S&P 500 up-variance to directly go long delta and volatility, thereby capturing the prolonged inflation process of the bubble.
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