The equity market’s enthusiasm for all things related to artificial intelligence seems to have overwhelmed concerns among investors over the loss of U.S. productive capacity and the imposition of tariffs.
After selling off during the initial tariff shock, the S&P 500 and Nasdaq indices are now setting records even as S&P 500 volatility falls below its long-term average.
The exuberance has spilled over to the more traditional Dow Jones Industrial Average and the Russell 2000 small-cap index, both of which have more than recovered their losses.
Is this a bubble in the making?
To answer this question, we look at our composite equity-market performance index, which is based on the level of S&P 500 returns and its volatility.
Last week, this index moved one standard deviation above levels of risk that would normally be expected.
In the past four business cycles, a move above one standard deviation has preceded equity market corrections. Even though the correction might have been short-lived, as occurred in April, the recent runup in equity valuations is a red flag that a correction could be in the making.
