With the resignation of Marko Kolanovic, chief strategist at jpmorgan, the largest short-seller in the US stock market, and the demotion of Mike Wilson, chief US stock strategist at morgan stanley, to a bullish stance, the largest bear on Wall Street has now become bank of america strategist Benjamin Bowler, who leads a stock derivatives team that has consistently communicated pessimistic forecasts to clients year after year.

This year is no exception. In the recently released report "2025 Outlook: The Roaring 2020s?" Bowler's team warned that the biggest risk in 2025 is investors misjudging the "technology bubble," which could be exacerbated by the most aggressive policy shift in the usa in a century.

The team wrote that the loosened monetary policy and tax cuts of the 1980s, along with the internet bubble of the 1990s, drove the record stock market boom, but the subsequent crashes of 1987, 2000, and 1929 taught us one thing: "the higher you climb, the harder you fall."

According to Bowler's team's analysis, 2025 could be a year where the "ai bubble and trump policy experiments collide," a situation that hasn't occurred in the usa since the 1920s. History shows that either of these two factors could drive US stocks dramatically up or down, and now the market may face both factors simultaneously, resulting in increased volatility.

Investors have yet to realize a key risk — the simultaneous impact of the ai bubble and trump policies.

Bank of america believes that a key risk for 2025 is that investors "are not yet aware that this is a historic moment," as well as how significant the tail risks are.

The bubble in the field of ai has become large enough, and ai concept stocks may accelerate the bubble, or they may give back a significant portion of their gains, both outcomes would lead to severe market fluctuations. Moreover, the usa is about to experience the most aggressive public policy shift in a century, which leaves the market still very fragile. At the same time, the macroeconomic uncertainty in the post-pandemic era remains high, and the usa's highest debt level in a century will only exacerbate market volatility.

The striking point of the argument is that whether it's a stock market bubble or a large-scale policy shift, both will lead to significant volatility in asset prices, 'and 2025 may witness both situations simultaneously, which may be unprecedented since the 1920s.'

This means that regardless of whether us stocks fluctuate upward or downward, their volatility will be amplified. The historic shock of the VIX this summer indicates a structural fragility in the market, which means that us stocks may be more susceptible to shocks and may have already reached a critical point.

Meanwhile, the Bowler team warns that the mistake investors may make is 'underestimating risks and remaining cautious,' hoping the market can provide more clarity and certainty, but this expectation may never materialize.

Their advice is: the key is to act in advance, recognizing that we are in a period of rising risks and rising returns. Although very few can accurately predict the market top or when the next major shock will occur, the Bowler team points out that the current market environment (such as the reduced volatility after the us election) and the mispricing across asset classes offer opportunities for investors.

If Trump fulfills his campaign promises...

The Bowler team believes that if Trump fulfills his campaign promises, the usa will see the largest policy easing since the Reagan administration, the largest tariff hike since the Smoot-Hawley Act of 1930, and the largest scale of illegal immigrant deportation in American history.

Although such policies brought a brief prosperity to us stocks, what followed was the Great Depression, such as the Great Crash of 1929, the crash of 1987, and the bursting of the internet bubble in the early 2000s.

The report states that since 1921, the largest rise in the usa stock market before a bear market is often followed by the largest decline in the subsequent year.

AI - Technology stocks in the internet plus-related era?

Next, turn to the key support of technology stocks - the 'chatbot' revolution. The Bowler team believes that the current AI boom shares similarities with the internet bubble of the late 1990s.

At that time, the internet bubble lasted for over 5 years, during which the nasdaq 100 index grew 11 times, and as the bubble developed, risks and returns generally increased.

Now, the AI rebound has already 'gone too far.' Since the launch of ChatGPT, the latest AI boom has only been two years, and the nasdaq 100 has risen by 85%, while the 'seven giants' stocks have risen by 200%.

From a technical and valuation perspective, bank of america believes that today’s volatility and valuations indicate that technology stocks are closer to the state of 1996/1997 than they were in 1998/1999.

However, macro and historically vulnerable factors may disrupt this optimistic sentiment.

The report points out that usa debt/GDP is nearing a record 120% today, while it was only 30% in the 1920s and even exceeded peak levels during World War II. With macro uncertainty and policy risks leading to higher and longer-lasting interest rates, along with budget deficits posing greater risks of potential policy shifts (higher debt service costs exacerbating deficits), there is a risk that the ​bonds market will retaliate.

The Bowler team wrote that this is "the biggest visible left-tail risk today, which will be exacerbated by the high valuations already present due to the ai boom thus far." And as bank of america stated, a great prosperity is inevitably followed by a great depression.

When will the ai bubble burst? Let the bullets fly for a while.

Interestingly, bank of america believes that ai is already a bubble on one hand, while on the other hand, it predicts that it will grow into an even larger bubble.

The core argument of bank of america is that historically, when technological advancements promise massive productivity growth, it often leads to the formation of asset bubbles. This is because investors are overly optimistic about the transformative and growth potential of new technologies, leading them to be willing to pay high stock prices for these anticipated future gains.

Examples from three historical periods: the stock boom of British railroads in the 1830s to 1860s, the radio and autos boom in the USA during the 1920s, and the internet bubble of the 1990s.

Considering this, bank of america pointed out that the current ai boom has similarities with the internet bubble of the late 1990s, but there has not yet been a significant increase in volatility like that seen in the late 1990s internet bubble.

In addition, technology valuations are still far from reaching the peak levels seen during the internet bubble of the 1990s.

A notable characteristic of the internet bubble of the 1990s was its resilience to macro risks. Despite experiencing major macro crises such as the asia financial crisis (1997) and the collapse of long-term capital management (1998), as well as the nasdaq entering a bear market and the Federal Reserve raising rates by over 100 basis points, the internet bubble continued to amplify.

If the Federal Reserve further lowers interest rates in 2025 according to market expectations (assuming the economy does not collapse), this may increase the upside risk in the market and add fuel to the bubble.

The current AI boom differs significantly from the internet bubble of the 1990s, especially in terms of the concentration and scale of market leaders. Today's AI 'leaders' are enormous and occupy a much larger share of the market compared to internet companies in the 1990s.

For the biggest beneficiaries of the AI boom, such as nvidia, reaching the valuation levels recorded during the 1990s internet bubble may be more difficult. If nvidia reaches the valuation that cisco had at the peak of the technology bubble, its market cap would reach about $11 trillion, accounting for over 45% of current usa GDP, which is extremely unlikely to happen in reality.

Therefore, beneficiaries of the AI bubble may need to expand to smaller companies to generate similar valuation effects. As the report stated, the current momentum of the AI boom might not yet have reasons to deplete, and the bubble could last for a while.

The Bowler team also pointed out that the record concentration of stocks in the usa has led to a historic concentration of active risk. If stock volatility increases further and concentration rises, this will further amplify the challenges of managing a stock portfolio relative to the market cap weighted benchmark as the asset bubble expands. In the s&p 500 index, technology stocks contribute to a record level of volatility (or risk) in overall market returns.

Therefore, as the bubble progresses, this risk may increase further. Additionally, individual stocks are becoming increasingly fragile, making it more necessary to manage active risk around key catalysts such as earnings. The good news is that the options market is increasingly underestimating this risk, providing potential arbitrage opportunities for investors.

Both the vulnerability of the large cap and individual stocks are on the rise.

Finally, turning to vulnerability, as the Bowler team pointed out, structural vulnerability in the usa financial market has significantly increased over the past few decades. This is due to investors tending to rush into limited momentum trading (buy on the rise, sell on the fall), facing liquidity pressures when exiting the market, especially when liquidity is most needed.

Bank of America first presented the view in 2016 that the market is shifting towards a more peaked distribution, meaning that the market will experience longer periods of calm followed by greater volatility. The s&p 500 index has seen two of the four largest vulnerability shocks in nearly a century, and its vulnerability has increased fivefold since the global financial crisis.

Moreover, the vulnerability of individual stocks in the usa is also on the rise, with both frequency and magnitude approaching extreme levels not seen in thirty years. Vulnerability typically spikes around earnings reports.

Bank of America warns that with the rapid development of ai technology, the valuations of technology stocks have become extremely high, which may lead to an excessively high market concentration, thereby increasing market vulnerability. Additionally, the Trump administration may relax regulations on ai and strengthen policies such as export controls, further raising uncertainty and risks in the market.