Falling Magnificent 7 volatility suggests U.S. stock market not in a bubble - BofA

Investing.com -- A decline in volatility in the so-called Magnificent 7 group of megacap stocks suggests that the U.S. stock market is not yet in a bubble, according to analysts at Bank of America Securities.

Shares in these companies -- Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google-owner Alphabet (NASDAQ:GOOGL), Facebook-parent Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN), and Tesla (NASDAQ:TSLA) -- have surged over much of the last 12 months, accounting for more than 60% of the S&P 500's total return in 2023. The heavy concentration of wealth has fueled some concerns over possible risks to both the U.S. and global stock markets.

But in a note to clients on Wednesday, the Bank of America analysts noted the relative stability in these stocks suggests that an asset bubble, which is historically marked by volatility rising with prices, has yet to form.

"The decoupling between upside and downside vol in these stocks is reminiscent of the 2000s tech bubble, but earnings better meeting price-expectations and the asymmetry in [Magnificent 7]’s macro reaction function suggests that this trend may be more due to the pain trade still being higher," the Bank of America analysts wrote.

They flagged that "fragility risks" are still high due to pressures posed by "fickle liquidity" and broader market momentum. However, the analysts added that these risks are "not extreme."