Market cycles are being redefined. A new report from Bank of America (BofA) suggests the world has entered an unprecedented "bubble era"—where rapid alternations between booms and busts will become the new normal. This phenomenon stems from the extreme expectation gap driven by AI technology—the chasm between humanity’s desire for an AI-driven "abundant future" and current realities is fueling persistent volatility.
BofA’s global research team highlights that every major technological leap since the 19th century has spawned massive asset bubbles, but the AI revolution, backed by governments, is unprecedented in scale. The bank’s bubble risk indicators show that while core AI assets haven’t fully detached from fundamentals, markets are evolving toward more bubble-like conditions, making an eventual rupture seem inevitable.
Despite 2025 markets exhibiting classic bubble traits, BofA’s risk metrics reveal U.S. core tech stocks haven’t entered extreme instability zones, with current valuations still far from the frenzy of the 1990s dot-com bubble.
Challenging conventional wisdom, BofA asserts that "diversification is wrong" in bubble eras. Instead, concentrated positions in leading assets paired with cash hedging are optimal, as bubble assets typically outperform before collapse.
**Government Backing Rewrites Bubble Rules** The report emphasizes the historical link between technological disruption and asset bubbles—from 19th-century British railway stocks to 1920s U.S. auto/radio booms and the dot-com bubble. These bubbles took years to form and led to prolonged downturns. BofA notes all tech-driven bubbles share two elements: retail participation and leverage expansion.
Unlike past cycles, today’s AI bubble enjoys robust government support, with nations viewing AI integration as critical for geopolitical competitiveness. This "official endorsement" ensures prolonged capital inflows, as public funds offset private fatigue, sustaining the bubble beyond pure market logic. Geopolitical rivalries further reinforce bubble resilience, with no country willing to fall behind in this "arms race."
**Expectation Gap Fuels Volatility** BofA attributes current market swings to AI’s "expectation gap effect"—where its promised transformative future remains unrealized, creating vast uncertainty. This triggers rapid mood swings between euphoria and skepticism, rendering traditional cycle models obsolete. Breakthroughs spark rallies, while delays trigger corrections, with volatility becoming more abrupt and frequent.
**Bubble Indicators Flash Warnings** BofA’s proprietary bubble risk framework tracks four price traits: returns, volatility, momentum, and fragility. A key red flag is rising volatility during price gains—contrary to normal markets—signaling FOMO-driven extreme positioning. While U.S. equities and the "Magnificent 7" tech stocks show no full-blown instability, niche sectors like nuclear energy, quantum computing, and select Asian indices display bubble-like traits. The bank warns readings above 0.8 often precede severe instability.
Notably, U.S. tech valuations, though elevated since 2022, remain below dot-com peaks. Broader market fundamentals also show less detachment than in 2000, suggesting room for further upside.
**Unprecedented Scale Brings New Risks** BofA cautions the AI bubble’s sheer size—with NVIDIA’s market cap eclipsing entire European nations—poses unique risks. Such scale may suppress typical bubble volatility, but a negative earnings surprise could trigger abrupt selloffs. If NVIDIA matched Cisco’s 2000 peak P/E of ~200x, its valuation would hit $20.8 trillion.
Long-term projections remain contentious: NVIDIA CEO Jensen Huang forecasts $3-4 trillion annual AI spending by 2030 (potentially $5 trillion long-term), while McKinsey estimates $7 trillion cumulative data center investments. However, doubts persist about large language models achieving artificial general intelligence (AGI) or delivering promised productivity gains.
**Concentration Over Diversification?** BofA advocates counterintuitive strategies: during bubbles, diversification increases risk. Historical data shows bubble-frontier assets consistently outperform until collapse. Thus, spreading bets equates to timing the bubble’s peak—a perilous approach.
For instance, during the dot-com bubble, maintaining concentrated tech exposure with cash/derivative hedges proved superior. Similarly, 1920s bubble leaders outpaced global markets—explaining why 2025’s "peak U.S. exceptionalism" narrative conflicts with AI bubble dynamics.
**Inevitable Rupture Ahead** While timing remains elusive, BofA concludes the AI bubble’s collapse is inevitable, with tightening financial conditions likely serving as the catalyst—a common precursor to major bubble bursts. Volatility will stay elevated, markets remain fragile, and debates over AI’s potential will continue amplifying uncertainty.
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