Volatility says no AI bubble (yet) - BofA
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VOLATILITY SAYS NO AI BUBBLE (YET) - BOFA
Worries of a bubble have simmered beneath the cheer as generative AI optimism catapulted global stock markets to record highs in the past year.
But Bank of America equity-linked analysts say volatility levels suggest AI is not in fact a bubble (though they caveat that with a "yet".)
"Volatility rising along with asset prices is among the clearest signs of an asset bubble," they say, "...however, the lack of a material rise in tech volatility suggests we are not there yet."
This is a good sign. Especially given volatility rose before the market peak of every post-1920s asset bubble, according to BofA.
"Return dispersion (how much stocks diverge) also shows few bubble signs as do valuations compared to the late '90s,".
All very reassuring. But don't get too relaxed.
BofA still thinks incorporating AI into the economy without a subsequent bubble might prove tricky.
"It may be hard to avoid given the likely significant but unclear way in which AI will impact the global economy, not dissimilar to the internet in the '90s or railroads in 1840s Britain," they write.
"The potential for irrationality" is only strengthened by the dominance of price momentum, investors' belief in buying equity dips, and meme stock popularity, they warn.
Active stockpickers should be particularly astute.
BofA says the proportion of active equity risk emanating from U.S. tech today is at all-time highs, even surpassing the 2000s.
If an AI bubble does develop, this could rise even further, making it increasingly challenging to generate alpha outside of these dominant stocks, they say.
(Lucy Raitano)
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