An unprecedented situation in the past 30 years! The volatility of US stock indices is the lowest since 1960, while individual stock volatility is as high as 7 times the index.

The U.S. stock market is exhibiting a rare split pattern: the S&P 500 index appears calm on the surface, but behind this tranquility, individual stocks are experiencing intense volatility that is troubling investors and signaling more turbulence ahead. This extreme divergence between index and individual stock volatility is reshaping market dynamics and testing investors’ risk management capabilities.

According to Bloomberg on Saturday, Barclays data shows that the trading range of the S&P 500 this year has hit its narrowest level since the 1960s, yet individual stock volatility has reached about seven times that of the index, representing the largest gap in at least 30 years. Disruptive concerns brought by artificial intelligence are triggering sharp rotations across sectors, as investors try to determine which industries will be the next targets of AI disruption.

This abnormal market environment has had a tangible impact on investor behavior. Goldman Sachs’ prime broker trading data indicates that hedge funds have been net selling U.S. stocks at the fastest pace since March last year this month. Bank of America clients sold off U.S. equities last week, with outflows reaching $8.3 billion, the third-highest level on record since 2008. A survey by the American Investment Council shows that active equity managers have reduced their stock exposure to the lowest level since July last year.

Strategists warn that this environment could persist throughout the year and face multiple recent catalysts, including potential U.S. military action against Iran and the upcoming earnings report from AI bellwether Nvidia next week. Historical data suggests that similar market structures have appeared at major turning points, such as before the 2008 financial crisis and prior to last year’s large-scale tariffs introduced during the Trump administration.

AI shifts from a bullish driver to a source of uncertainty

Breakthroughs in artificial intelligence technology were once a bullish catalyst for markets, but now they frequently trigger uncertainty. This shift is reshaping investment logic, turning “stock picking” from seeking opportunities into “avoiding crashes.”

Stefano Pascale, head of US equity derivatives research at Barclays, attributes this divergence in volatility to investors trying to identify which sectors might become the next victims of AI disruption, combined with the effects of high valuations and high interest rate environments.

Michael O’Rourke, chief market strategist at JonesTrading Institutional Services, said, “This is a stock-pickers’ market, but not in the traditional sense. Today, stock picking means avoiding a crash.” He believes this environment indicates cracks in investors’ optimism about the broader market, making them more prone to sell off when bad news hits.

AI concerns are even affecting the so-called Mag7 tech giants. Since the rotation into tech stocks began in late October last year, Microsoft and Meta have both declined by double digits from their recent highs.

Volatility divergence reaches historic extremes

The S&P 500 has been nearly flat over the past four months, with this week’s closing price roughly the same as four months ago. But this apparent calm masks underlying intense fluctuations.

According to Barclays data, the roughly sevenfold gap between individual stock volatility and index volatility is the highest in at least 30 years. This extreme divergence reflects growing internal structural pressures within the market.

JPMorgan’s strategists expect this situation to become the “new normal” for the year. Historical experience shows that similar market structures have often preceded major turning points.

O’Rourke warned, “When a crisis hits, correlations tend to converge.” He pointed out that stocks previously moving independently can suddenly decline in unison, and volatility at the individual stock level may serve as an early warning sign or potential tremor of waning investor confidence.

Investors sharply reduce exposure

In the face of uncertainty, institutional investors are adopting defensive measures. The wave of selling in specific stocks and sectors is prompting many to reassess the risks of holding highly concentrated positions.

Tom Hainlin, national investment strategist at Bank of America, said that evidence of waning investor confidence is mounting, and the selling of stocks and sector-specific holdings is pushing many to reevaluate the risks of concentrated positions.

Jed Ellerbroek, portfolio manager at Argent Capital Management, noted that the pace of AI adoption is faster than the internet boom of the late 1990s, warning investors to get used to an unprecedented level of disruption this year.

Despite increased volatility, some remain optimistic. During the Q4 earnings season, the proportion of S&P 500 companies reporting quarterly profit growth reached its highest in four years. Broader sector participation in the market rebound also encourages investors, as recent gains have been mainly concentrated in tech stocks. Cayla Seder, macro multi-asset strategist at Dreyfus, said, “From a high-level perspective, this phenomenon reflects a strong overall environment and suggests systemic risks are being contained.”

However, as AI applications continue to accelerate, Ellerbroek from Argent believes that a volatility breakout at the index level is only a matter of time, and advises investors to maintain diversification. He stated that investors are scrutinizing “whether AI is helping or hurting,” and that “there are no free passes anymore.”

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Market risks are inherent; invest cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should evaluate whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.