The U.S. stock market has entered an unstable correction phase after an artificial intelligence (AI)-led rally, heightening investor caution. As the gains that continued through last month have slowed, the volatility index (VIX) has surged, and an unusual phenomenon of stock prices and volatility rising together has been observed. Fears of a bubble are spreading across the market, with options trading volume and hedging demand jumping.
On the 9th (local time), Bloomberg reported that Maxwell Grinacoff, head of U.S. equity derivatives research at UBS Group, said, "Investors recognize that market fragility is increasing," adding, "We are in a fragile situation where the VIX can jump nearly 20% in a single day on a minor variable." He analyzed, "Investors are chasing the uptrend while simultaneously taking dual positions to prepare for a decline."
After President Donald Trump warned of additional tariffs on Chinese imports in early last month, the VIX maintained a high risk premium relative to realized volatility. The Standard & Poor's (S&P) 500 index hovered near a record high, but volatility could not fall below the 16–17 range. This is seen as the result of sentiment in which investors are chasing the rally while remaining wary of a sharp drop.
There are several factors behind market anxiety. With concerns about a federal government shutdown and uncertainty over whether the Federal Reserve will cut rates in December, individual stocks swung sharply after earnings releases, adding to market unease. In particular, with few macro data releases and the Trump administration's policy direction unclear, investors are turning to alternative data to make decisions, which has also added to uncertainty.
UBS analyzed that "a gap in economic data, political uncertainty, and weak earnings are overlapping, keeping market volatility temporarily elevated." In fact, the S&P 500's 30-day realized volatility more than doubled last month to the highest level since June. The VVIX index, which represents the volatility of volatility, also rose, and more investors are using VIX options to hedge risk.
Tanvir Sandhu, chief derivatives strategist at Bloomberg Intelligence, assessed, "The VIX is moving at a higher level than last year, and volatility expansion is occurring alongside momentum-chasing and policy uncertainty." He added, "After the AI rally, the spread between single-stock volatility and index volatility widened excessively and is gradually normalizing after the end of earnings season."
Bank of America pointed out in a recent report that "when asset prices rise while volatility also increases, it is a classic sign of a bubble." The report said, "The AI rally shows similarities to the early-2000s tech bubble, and there are signs that stock prices are decoupling from fundamentals on momentum."
In the early part of earnings season, individual stock moves far outpaced the indexes, but recently, as macroeconomic anxiety has grown, broad market volatility is regaining the lead. Experts assessed, "The surge led by AI-related tech stocks overheated investor sentiment, and as a reaction, options demand and volatility gauges are rising together."
Sandhu said, "With upside expectations and risk aversion operating at the same time, the market has entered a two-way risk zone," adding, "As fatigue from the AI rally grows, some investors are still buying call options to bet on further gains."
Meanwhile, UBS said, "The current market tension is likely a natural correction following short-term overheating," and predicted, "The Federal Reserve's rate decision in December and the resolution of U.S. government shutdown risks will determine the direction of year-end stocks."