AI Loses Grip on U.S. Stock Market as Bond Yields and Macro Risks Take Center Stage

NEW YORK — Artificial intelligence is losing some of its dominant influence over the U.S. stock market as investors increasingly turn their attention to rising Treasury yields, inflation, oil prices and Federal Reserve policy.

A key volatility relationship that options traders have monitored throughout the year is beginning to reverse. The gap between volatility in major technology stocks and volatility across the broader market—often measured by the difference between the Cboe’s VIXEQ and VIX indexes—reached record levels during the summer as AI-linked technology companies experienced enormous daily swings in market value.

That trend is now changing. Traders are increasingly selling broad index exposure, pushing the VIX higher relative to VIXEQ and suggesting that market-wide economic concerns may be replacing AI optimism as the dominant force driving stocks.

The shift comes as U.S. Treasury bonds face renewed selling pressure and the 10-year Treasury yield approaches 5%, a level that could significantly influence equity valuations and investor sentiment.

“Throughout the summer single-name implied volatility raced ahead of S&P 500 implied volatility,” said Scott Nations, president of Nations Indexes. He noted that traders had largely focused on individual companies and AI-related stories while paying less attention to broader economic issues.

According to Nations, that pattern is now reversing as concerns over resurgent inflation, higher oil prices, Federal Reserve policy and geopolitical developments increasingly dominate investor thinking.

Oil Prices Add to Market Concerns

The rise in crude oil prices is another factor reshaping market expectations. Oil futures have climbed back above $100 a barrel, reaching their highest level since May.

Energy stocks have benefited from the move. The Energy Select Sector SPDR ETF has extended its lead over technology stocks as the best-performing S&P 500 sector of the year, gaining about 43%.

Volatility across major energy and technology stocks has also shifted. Nations said volatility in 18 of the 19 stocks tracked by his VolDex measure declined on Thursday, with Exxon Mobil the only exception.

AI Volatility Is Cooling

Another reason for the decline in AI-related volatility is the end of earnings season. Earnings reports often create major price swings because investors must react to significant, unpredictable corporate results.

As earnings catalysts fade, options activity surrounding some of the market’s most popular technology names has also weakened.

Micron, for example, saw its implied volatility fall from 112 ahead of its late-June earnings report to as low as 58 last week, even as the stock price declined.

SpaceX has experienced a similar pattern. Despite gaining roughly 30% since its August report, its implied volatility dropped from about 122 to 56.

Retail options activity can also create a feedback loop. When popular stocks continue rising, bullish options flows can increase volatility. But when those stocks stop climbing, demand for bullish options may decline, reducing volatility further.

Market Focus Shifts Toward the Economy

Kevin Davitt, head of index options content at Nasdaq, said the relationship between volatility in individual stocks and the broader market has now largely returned to normal.

The earlier divergence was particularly pronounced among semiconductor stocks, where rising share prices were accompanied by rising volatility and eventually influenced broader index options markets.

The latest developments suggest that the market's attention is moving away from company-specific AI stories and toward the broader economic environment.

With oil prices rising, Treasury yields nearing 5%, inflation remaining a concern and the Federal Reserve preparing for its September 16 policy meeting, investors may increasingly view macroeconomic and policy developments as the key drivers of stock-market direction.

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