Bank of America warned that the US stock market faces increased shock risk as the gap between individual stock volatility and overall market volatility has widened to levels approaching the dot-com bubble era. According to Business Insider on the 14th (local time), BofA stated in a recent report that 'the divergence between individual stock and index volatility has neared the extreme levels seen during the dot-com bubble.' Data published by the Chicago Board Options Exchange (CBOE) in June showed that the spread between the S&P 500 constituent stock volatility index (VIXEQ) and the volatility index (VIX) expanded to a record high. This pattern of divergence historically preceded major market corrections, including the dot-com bubble collapse.
CBOE Data Shows Record VIXEQ-VIX Spread
VIXEQ reflects the average volatility of individual stocks comprising the S&P 500 index, while VIX is calculated based on S&P 500 options prices and is commonly referred to as the 'fear index' representing overall market volatility. As of the article date, VIXEQ stood at approximately 50, up 46% from the beginning of the year, while VIX remained at around 16, up only 13% over the same period.
BofA Compares Current Divergence to Dot-Com Bubble Period
BofA noted that this widening divergence between individual stock and index volatility also appeared immediately before the dot-com bubble collapse. The bank stated, 'Index volatility remains at low levels while a historically rare divergence is forming.' BofA added that 'if not only stock prices but also valuations approach bubble territory, this divergence could exceed the levels seen during the dot-com bubble.'
Semiconductor Sector Correction Drives Volatility Gap
BofA identified the semiconductor sector correction as the primary cause of the expanding volatility divergence. The iShares Semiconductor ETF (SOXX), which tracks the semiconductor sector, remained up 83% year-to-date but had declined approximately 12% from its peak recorded in late June. Meanwhile, sector rotation into other areas kept index volatility relatively contained. BofA also analyzed that the significantly weakened correlation between semiconductor stocks and other large technology and software stocks contributed to the spread expansion. BofA explained, 'The correlation between semiconductor stocks and the overall market is currently approaching record lows.'
Stifel Warns of Potential Market Volatility Expansion
Stifel also stated in a recent report that the narrowing of the gap between VIXEQ and VIX has often preceded large-scale stock market corrections in the past. The firm diagnosed that there is a need to remain vigilant about the possibility of expanding market volatility going forward.
FAQ
What did Bank of America warn about US stocks volatility?
Bank of America warned that the US stock market faces increased shock risk due to the widening gap between individual stock volatility (VIXEQ) and overall market volatility (VIX), which has approached levels last seen during the dot-com bubble era. According to CBOE data from June, VIXEQ stood at approximately 50 (up 46% year-to-date) while VIX remained at around 16 (up only 13% year-to-date), creating a record spread.
Why did the volatility divergence widen according to BofA?
BofA identified the semiconductor sector correction as the main cause of the expanding volatility divergence. The iShares Semiconductor ETF (SOXX) declined approximately 12% from its late June peak despite remaining up 83% year-to-date, while sector rotation kept index volatility low. Additionally, the correlation between semiconductor stocks and the broader market approached record lows, contributing to the spread expansion.
