FOMO vs. bubble angst signals more stock volatility in 2026

The U.S. stock market is expected to remain on guard next year, with investors torn between fears of missing out on the artificial intelligence rally and worries that it’s a bubble just waiting to burst.

Massive sell-offs and rapid reversals have characterized stock markets over the past 18 months. This trend is expected to continue through 2026, with some strategists predicting that AI will follow the boom and bust cycle of past technological revolutions.

The tech companies at the center of the AI ​​investment boom wield outsized influence. While the group’s divergence from the rest of the S&P 500 has helped blunt realized market volatility in 2025, as gains in the tech sector offset declines elsewhere, investors are paying attention to the spread of stumbles in chip names. This would cause volatility indicators such as the Cboe Volatility Index to rise.

“2025 has generally been a year of rotation and narrow leadership, rather than a year of broad risks and risk aversions,” said Kieran Diamond, derivatives strategist at UBS Group AG. “This has helped drive implied correlation levels to historic lows, exposing the VIX to outsized spikes whenever we see macroeconomic factors take over again.”

The magnitude of the rise in stock prices has made bubble anxiety the top concern for money managers, according to a recent Bank of America Corp. survey. But another risk is the classic risk of missing out if he has even more room to maneuver, which could punish anyone who pulls out too early.

Strategists expect stock volatility to be sustained in 2026, mainly because asset bubbles tend to become more unstable as they inflate. As a result, they say investors should expect occasional declines greater than 10%, but with record rallies as traders realize the bubble is not yet bursting.

For UBS strategists, the question of whether the AI ​​boom continues or collapses makes holding contracts that benefit from greater volatility on the tech-heavy Nasdaq 100 index essential to playing both sides of the market. Maxwell Grinacoff, head of U.S. equity derivatives research at the Swiss bank, says volatility bets on the gauge work best in both scenarios, adding that the trade can be structured to be directionally neutral using straddles or over-the-counter swaps.

Buying Nasdaq 100 volatility while selling S&P 500 volatility is “my most compelling trade for next year,” Grinacoff said.

However, there may be longer periods of calm between moments of tumult. JPMorgan Chase & Co. strategists say volatility is torn between technical and fundamental factors that suppress it and macroeconomic factors that support above-average levels. While the median VIX level will remain around 16 to 17 for 2026, periods of risk aversion will push the index higher, they say.

Another technical factor that will affect the price of options is an imbalance in investment flows which is expected to steepen the volatility curve in 2026, according to Antoine Porcheret, head of institutional structuring for the UK, Europe, the Middle East and Africa at Citigroup Inc.

“At the short end of the curve, you have significant supply from both retail and institutions. There has been significant growth in QIS and vol carry strategies, and that will likely amplify next year,” he said. “In the long term, you have hedging flows that will keep the long end high, so you can expect a steep term structure.”

Popular spread trading – which involves betting on a single stock’s higher volatility and lower index movements – will likely be particularly popular at the start of the year as investors implement new versions of the strategies. Some funds are now taking the opposite position in what they see as a crowded market.

“Dispersion is an extremely popular and crowded tourism sector these days,” said Benn Eifert, managing partner and co-chief investment officer of QVR Advisors, a San Francisco-based volatility fund. “We have the reverse dispersion trade.”

Companies will need to be more creative in extracting returns from dispersion strategies, said Alexis Maubourguet, chief investment officer of Adapt Investment Managers, a Swiss hedge fund. Investors looking for more upside will explore the variants.

“Dispersion is now a well-known strategy and a lot of the alpha is gone,” Maubourguet said. “You can improve your implementation, you can improve your name selection. The third way to do this is to improve your timing and negotiate tactically around your position.”

Others expect the flow of capital into dispersion strategies to keep demand for single-stock volatility relatively high.

“Many dispersion programs will expire in January, so hedge funds will reload on custom basket dispersion, which will likely maintain a stock’s volume premium relative to the index,” Porcheret said.

Some players simply buy volatility on individual stocks, while others simultaneously sell a smaller amount of index volatility to help reduce the cost of carry during quiet periods, Maubourguet added.

The biggest question for investors is how to anticipate any sudden moves. Societe Generale SA strategists, including Jitesh Kumar, presented in a client note a fundamental volatility regime model that they apply to dynamically switch between long and short volatility trades.

Generally speaking, a flattening yield curve is the signal to buy volatility, while short volatility trades are triggered by a steepening curve. Although the model underperformed the S&P 500 total return over a two-decade period, it avoided significant declines in 2008 and 2020.

The model – which strategists say has a proven track record of predicting volatility inflection points – portends higher volatility for 2026. The overall U.S. corporate sector has low leverage, but strategists believe it is on the cusp of a new AI-driven re-leveraging cycle that should lead to higher credit spreads and equity volatility.

Overall, tail risk hedging will be especially important for investors in 2026, according to Tanvir Sandhu, global chief derivatives strategist at Bloomberg Intelligence.

“Investor FOMO, conflicting AI narratives, and the U.S. administration as a source of volatility create a favorable backdrop for trading volatility, setting the stage for the left and right tails to wrench in 2026,” he said.