An unprecedented situation in the past 30 years! The volatility of U.S. stock indices is at its lowest since 1960, while the volatility of individual stocks is as high as 7 times that of the indices

The U.S. stock market is exhibiting a rare split pattern: the S&P 500 index appears calm on the surface, but beneath this tranquility, the sharp fluctuations in individual stocks are troubling investors and signaling more turmoil ahead. This extreme divergence between index and individual stock volatility is reshaping the market landscape and testing investors' risk management capabilities.

According to a report by Bloomberg on Saturday, Barclays data shows that the trading range of the S&P 500 index this year has recorded the narrowest range since the 1960s, while individual stock volatility has reached about seven times that of the broad index, the largest gap in at least 30 years. The disruptive concerns brought about by artificial intelligence are triggering severe rotations among sectors, as investors attempt to determine which industries will be the next targets of AI disruption.

This unusual market environment has had a tangible impact on investor behavior. According to Goldman Sachs' prime brokerage trading data, hedge funds have net sold U.S. stocks at the fastest pace since March of last year this month. Bank of America clients sold U.S. stocks last week, with single-stock outflows reaching $8.3 billion, the third-highest level on record since 2008. A survey by the National Association of Active Investment Managers shows that stock-picking investors have reduced their stock exposure to the lowest level since July of last year.

Strategists warn that this environment may persist throughout the year and face multiple recent catalysts, including the possibility of U.S. military action against Iran and the earnings report from AI bellwether Nvidia next week. Historical data shows that similar market structures have appeared at significant market turning points, such as before the 2008 financial crisis and the introduction of large-scale tariffs by Trump last year.

AI Shifts from a Positive to a Source of Uncertainty

The breakthroughs in artificial intelligence technology were once a bullish driver for the market, but now they frequently trigger uncertainty. This shift is reshaping investment logic, turning "stock picking" from seeking opportunities to "avoiding crashes."

Stefano Pascale, head of U.S. equity derivatives research at Barclays, attributes this differentiated volatility to investors trying to determine which sectors may become the next targets of AI disruption, along with the combined effects of high valuations and a high-interest-rate environment.

Michael O'Rourke, chief market strategist at JonesTrading, states, "This is a stock picker's market, but not in the traditional sense. Today, stock picking is about avoiding crashes." He believes this environment indicates that investors' optimistic outlook on the broad market is showing cracks, making them more likely to sell off when bad news hits.

Concerns about AI have even affected the so-called Mag7 tech companies. Since the rotation of tech stocks began at the end of October last year, both Microsoft and Meta have seen double-digit declines from their peaks.

Volatility Divergence Reaches Historical Extremes

The S&P 500 index has been nearly flat over the past four months, with this week's closing price being roughly the same as it was four months ago. However, this apparent calm conceals the underlying severe volatility.

According to Barclays data, the gap of about seven times between individual stock volatility and index volatility is the highest level in at least 30 years. This extreme divergence reflects that structural pressures within the market are accumulating JP Morgan's trading department strategists expect this situation to become the "new normal" for the year. Historical experience shows that similar market structures have often been precursors to significant turning points.

O'Rourke warned, "When a crisis hits, all correlations tend to converge." He pointed out that stocks that were originally operating independently may suddenly decline in sync, and volatility at the individual stock level could be "an early warning sign or potential tremor of some investors' waning confidence."

Investors Significantly Reduce Exposure

In the face of uncertainty, institutional investors are taking defensive measures. The sell-off in stocks and sectors has prompted many investors to reassess the risks of holding highly concentrated positions.

Tom Hainlin, a national investment strategist at Bank of America, stated that evidence of waning investor confidence is increasing, and the sector-specific sell-off is driving many to reevaluate the risks of holding highly concentrated positions.

Jed Ellerbroek, a portfolio manager at Argent Capital Management, noted that the pace of AI adoption is faster than that of the internet in the late 1990s and warned investors to get used to this year's "unprecedented" level of disruption.

Despite the increased volatility, there are also views suggesting that optimism should be maintained. During the fourth quarter earnings season, the proportion of S&P 500 constituent companies reporting quarterly profit growth reached its highest level in four years. The participation of more sectors in the market rebound has also encouraged investors, as the previous months' gains were mainly concentrated in technology stocks. Cayla Seder, a macro multi-asset strategist at State Street Bank, stated, "From a high level, this phenomenon reflects the strength of the overall environment and indicates that systemic risks are being contained."

However, as AI applications show signs of continued acceleration, Ellerbroek from Argent believes that volatility breaking through to the index level is just a matter of time and advises investors to maintain diversification. He stated that investors are closely examining "whether AI is helping or hurting," and "there are no more free passes."