FOMO Meets Bubble Fears as Volatility Risks Build for Stocks in 2026

The US stock market looks set to remain on a knife’s edge in the year ahead, as investors continue to wrestle with two competing emotions. On one side is the fear of being left behind as artificial intelligence drives powerful gains across equities. On the other is a growing unease that the rally surrounding AI may be overstretched, raising the risk of a painful correction if expectations begin to crack. This tension is shaping market behavior and is likely to define trading conditions well into 2026.

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Over the past 18 months, sharp selloffs followed by rapid rebounds have become a recurring pattern across US equities. Periods of optimism have frequently been interrupted by sudden bouts of volatility, only for stocks to recover just as quickly.

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That stop-start dynamic has made markets more challenging to navigate, even as major indexes continue to hover near record levels. Many strategists believe this pattern is unlikely to fade anytime soon, particularly as AI remains the dominant narrative driving investor decisions.

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Some market watchers argue that the current enthusiasm surrounding artificial intelligence bears similarities to earlier technological revolutions. While transformative innovations have historically delivered long-term economic benefits, they have also tended to produce exaggerated market cycles along the way.

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In several past instances, early excitement led to inflated valuations, followed by sharp corrections when reality failed to keep pace with expectations. Strategists caution that AI could follow a similar boom-and-bust trajectory before its full potential is realized.

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That risk is contributing to heightened sensitivity around earnings reports, economic data, and policy signals. Any sign that AI-related growth may be slowing or that companies are struggling to translate investment into profits has the potential to trigger outsized market reactions.

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At the same time, strong results or optimistic guidance can quickly reignite rallies, pulling sidelined investors back into the market. This push and pull has reinforced the market’s tendency toward abrupt swings rather than sustained trends.

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Valuations are a central part of the debate. Many of the companies most closely associated with artificial intelligence are trading at premiums that assume years of rapid expansion and strong margins.

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Supporters argue those expectations are justified, pointing to AI’s ability to reshape industries, boost productivity, and unlock new revenue streams. Skeptics counter that such projections leave little room for disappointment, increasing the risk of volatility if growth falls even slightly short of forecasts.

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Complicating matters further is the broader macroeconomic backdrop. While the US economy has shown resilience, uncertainty remains around interest rates, inflation, and global growth.

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Shifts in Federal Reserve policy or unexpected economic slowdowns could amplify market moves, especially in highly valued segments of the market. In this environment, investors are being forced to balance long-term conviction with short-term risk management.

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For portfolio managers, the challenge lies in staying exposed to AI-driven opportunities without becoming overly concentrated in a single theme. Many are opting for a more selective approach, favoring companies with clear paths to profitability, diversified revenue streams, and tangible use cases for artificial intelligence. Others are pairing growth exposure with defensive assets or alternative strategies to cushion against sudden drawdowns.

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Retail investors, meanwhile, continue to grapple with timing decisions. The fear of missing out has been a powerful force, pulling capital into stocks after sharp rebounds.

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Yet repeated pullbacks have also reinforced caution, prompting some investors to trim positions or wait for clearer signals before committing additional funds. This tug-of-war between optimism and skepticism has helped keep trading volumes elevated and sentiment fragile.

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Looking ahead to 2026, many strategists expect volatility to remain a defining feature of the market. While artificial intelligence is widely viewed as a genuine long-term growth driver, the path forward is unlikely to be smooth.

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History suggests that even transformative technologies experience periods of excess, correction, and consolidation before delivering sustained gains. As a result, investors may need to brace for continued swings as the market works through what AI ultimately means for corporate profits and economic growth.

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In the near term, the US stock market appears caught between opportunity and risk. The promise of artificial intelligence continues to draw capital and fuel rallies, but concerns about valuation and durability linger just beneath the surface.

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Until there is greater clarity on how AI-driven growth translates into consistent earnings, markets are likely to remain reactive, volatile, and driven as much by emotion as by fundamentals.

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