Next year, the US stock market is expected to remain turbulent, with investors torn between "FOMO" (fear of missing out) on AI-driven rallies and concerns over an impending bubble. Over the past 18 months, US equities have been characterized by sharp sell-offs and rapid rebounds—a trend likely to persist into 2026. Some strategists predict AI will follow the boom-and-bust cycles of past tech revolutions.
Tech giants, at the heart of the AI investment frenzy, wield significant influence. While the divergence between tech stocks and other S&P 500 sectors has somewhat dampened overall market volatility in 2025—with tech gains offsetting declines elsewhere—investors remain wary of potential spillover effects from chip stock selloffs. Should this occur, volatility gauges like the CBOE Volatility Index (VIX) could surge.
UBS derivatives strategist Kieran Diamond noted, "2025 has largely been a year of sector rotation and narrow leadership rather than broad risk-on or risk-off sentiment. This has pushed implied correlation to historic lows, leaving the VIX vulnerable to sharp spikes, especially if macro factors regain dominance."
A recent Bank of America survey revealed that soaring stock prices have made bubble fears fund managers' top concern. Yet another worry is missing further gains—exiting too early could mean lost opportunities. Strategists expect 2026 market volatility to be underpinned by the inherent instability of inflating asset bubbles. They advise investors to brace for occasional >10% pullbacks, followed by swift rebounds as traders realize the bubble hasn’t burst.
For UBS strategists, trading Nasdaq 100 volatility contracts is key to navigating AI’s uncertain trajectory—profiting from heightened swings. Maxwell Grinacoff, UBS head of US equity derivatives research, said, "Whether AI sustains or fizzles, volatility bets outperform," suggesting structures like straddles or OTC swaps. His top 2026 trade: "Long Nasdaq 100 volatility, short S&P 500 volatility."
However, prolonged calm may punctuate sharp moves. JPMorgan strategists noted volatility is caught between tech/fundamental suppressants and macro-driven boosts. While the VIX median may hover at 16–17 in 2026, spikes are likely during risk-off episodes.
Citi’s EMEA structuring head Antoine Porcheret highlighted imbalanced flows steepening the volatility curve: "Retail and institutional demand surges in short-dated options, while hedging lifts long-dated prices, steepening the term structure."
Dispersion trades—betting on rising single-stock volatility versus falling index volatility—may see a hot start in 2026, though some deem them overcrowded. Benn Eifert of QVR Advisors cautioned, "Dispersion is now a hypercompetitive, fleeting trade; we’re fading it." Adapt Investment’s Alexis Maubourguet stressed the need for creativity, suggesting tactical timing or stock-picking enhancements to capture fading alpha.
Others expect capital inflows to sustain single-stock volatility premiums. Porcheret noted January’s dispersion rollovers may renew demand, while Maubourguet added some investors hedge by selling index volatility to reduce carry costs.
Timing sudden volatility remains the core challenge. SocGen’s Jitesh Kumar proposed a dynamic long/short volatility model triggered by yield curve flattening (buy) or steepening (sell). Though lagging S&P 500 returns historically, it avoided major 2008/2020 drawdowns and signals 2026 volatility upticks.
With low corporate leverage and AI-driven re-leveraging likely widening credit spreads and equity volatility, tail-risk hedging will be critical. Conflicting AI narratives, FOMO psychology, and US policy uncertainty create fertile ground for volatility trading—making left- and right-tail protection essential for 2026.
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