The US stock market is exhibiting a rare split dynamic: while the S&P 500 index appears calm on the surface, intense volatility in individual stocks is troubling investors and signaling potential for further turbulence. This extreme divergence between index-level and single-stock volatility is reshaping the market landscape and testing investors' risk management capabilities.
Data from Barclays reveals that the S&P 500's trading range this year is the narrowest recorded since the 1960s. However, the volatility of individual stocks has reached approximately seven times that of the broader index, marking the largest gap in at least three decades. Concerns about the disruptive impact of artificial intelligence are triggering sharp rotations between sectors, as investors attempt to determine which industries might be the next targets of AI's influence.
This unusual market environment is already having a tangible impact on investor behavior. According to Goldman Sachs' prime brokerage data, hedge funds have been net sellers of US stocks this month at the fastest pace since March of last year. Clients of Bank of America sold US equities last week, with single-stock outflows hitting $8.3 billion, the third-highest level since records began in 2008. A survey by the National Association of Active Investment Managers indicates that stock-picking investors reduced their equity exposure to the lowest level since July 2023 at the beginning of this month.
Strategists warn that these conditions could persist throughout the year and face tests from multiple near-term catalysts. These include potential US military action against Iran and the upcoming earnings report from AI bellwether Nvidia. Historical data shows that similar market structures have preceded major turning points, such as during the 2008 financial crisis and around the announcement of large-scale tariff policies during the Trump administration.
Artificial intelligence, once a source of bullish momentum, is now frequently generating uncertainty. This shift is reshaping investment logic, transforming stock selection from a search for opportunities into an exercise in avoiding significant losses.
Stefano Pascale, Head of US Equity Derivatives Research at Barclays, attributes this divergence in volatility to investors trying to identify sectors vulnerable to AI disruption, combined with the effects of high valuations and elevated interest rates.
Michael O'Rourke, Chief Market Strategist at JonesTrading Institutional Services, stated, "This is a stock-picker's market, but not in the traditional sense. Nowadays, picking stocks is about avoiding collapse." He believes this environment indicates cracks are forming in investor optimism about the broader market, making them more prone to sell-offs if bad news emerges.
AI-related concerns have even affected the so-called "Magnificent Seven" tech companies. Since the rotation in tech stocks began in late October, both Microsoft and Meta have experienced double-digit declines from their peaks.
The S&P 500 has remained almost flat over the past four months, with this week's closing price nearly identical to that of four months ago. However, this surface-level calm masks significant underlying volatility.
The roughly seven-fold gap between single-stock and index volatility represents the highest level in at least 30 years, according to Barclays data. This extreme divergence reflects accumulating structural pressures within the market.
Strategists from JPMorgan's trading desk anticipate this situation will become the "new normal" for the year. Historical experience suggests similar market structures have been precursors to significant turning points.
O'Rourke cautioned, "When a crisis hits, all correlations converge toward one." He noted that stocks previously moving independently could suddenly fall in unison, and volatility at the single-stock level might serve as an "early warning sign of waning confidence among some investors or a potential tremor."
Faced with uncertainty, institutional investors are adopting defensive measures. Stock- and sector-specific selling is prompting many to reassess the risks of holding highly concentrated positions.
Tom Hainlin, National Investment Strategist at Bank of America, noted that evidence of weakening investor confidence is mounting, and specific selling pressures are driving many to reevaluate the risks of concentrated holdings.
Jed Ellerbroek, Portfolio Manager at Argent Capital Management, pointed out that the adoption rate of AI is faster than that of the internet in the late 1990s, warning investors to expect an "unprecedented" level of disruption this year.
Despite the increased volatility, some perspectives advocate maintaining optimism. During the fourth-quarter earnings season, the proportion of S&P 500 companies reporting quarterly profit growth reached its highest level in four years. Broader participation in the market rally beyond just tech stocks has also encouraged investors.
Cayla Seder, Macro Multi-Asset Strategist at State Street Bank, said, "From a high level, this phenomenon reflects the strength of the overall environment and suggests systemic risks are contained."
However, as AI application shows signs of persistent acceleration, Argent's Ellerbroek believes it is only a matter of time before volatility breaks through to the index level. He advises investors to maintain diversification, noting that investors are now scrutinizing in detail whether AI "helps or hurts," concluding that "there are no more free passes."