Quick Take: Despite recent selloffs in US equities, the AI-driven market rally isn’t approaching its peak—we’re just entering a more turbulent stretch that mirrors historical bubble patterns.
Market watchers have been nervously eyeing recent tech stock volatility, wondering if the AI-fueled rally is finally losing steam. But according to Mark Cudmore, Bloomberg’s macro strategist and Markets Live editor, who shared his analysis in recent public commentary, this turbulence is exactly what we should expect during this phase of an investment cycle—not a warning sign of imminent collapse.
The AI CapEx Bubble Framework
Cudmore frames the current market environment clearly: we’re in an artificial intelligence capital expenditure bubble. Companies are pouring massive resources into AI infrastructure, and this investment wave is driving significant market gains. The critical question isn’t whether this is a bubble—Cudmore openly acknowledges it is—but rather where we are in the bubble’s lifecycle.
“At some point, it’s going to burst naturally,” Cudmore stated during his market commentary. “Is this the burst? I strongly don’t think so.”
What’s particularly noteworthy here is the historical parallel Cudmore draws. Between October 1999 and March 2000, the Nasdaq 100 experienced more than four separate 10%-plus selloffs, along with numerous 5% corrections—all while the index doubled in just six months. That volatile period represented the final stage before the dotcom bubble peaked and ultimately collapsed.
Why This Time Follows a Different Tempo
The pattern emerging from current market behavior suggests we’re entering a similar volatile phase, but with crucial differences. Cudmore expects this cycle to move faster and with less extreme volatility than the dotcom era. The index isn’t likely to double from current levels, and the number of severe drawdowns should be more limited.
This creates an interesting dynamic for investors. The recent selloff, which Cudmore describes as “really mild at the moment,” could easily continue. But the fundamental catalyst for a true bubble burst hasn’t materialized yet. We’re seeing normal volatility within an ongoing expansion, not the beginning of a collapse.
The Dollar Strength Connection
Looking at currency markets reveals another layer to this analysis. Cudmore anticipates dollar strengthening into year-end, though not in dramatic fashion. The mechanism behind this projection involves several moving parts.
First, positioning remains relatively flat, leaving room for movement. Second, there’s potential upside for yields given the uncertainty around Federal Reserve policy. The data shows a Fed caught between cutting rates while stock markets continue rallying—a situation that seems incongruous when there’s no clear sign of economic deterioration.
If we see extreme risk aversion—say another 5-6% stock market selloff over coming days—the dollar would likely get a boost from deleveraging activity. Investors wouldn’t be buying dollars because of long-term conviction, but simply as part of unwinding leveraged positions.
Here’s where the AI bubble characteristic becomes important: because this is an equity-driven bubble, stocks would bounce first in any recovery. That stock market rebound would support the dollar through capital inflows, as global investors chase returns in U.S. equities.
The key insight here is that dollar strength into year-end wouldn’t signal a major shift in market structure—it’s a natural consequence of the ongoing AI investment cycle playing out across asset classes.
Equities Leading Fixed Income
One of the more fascinating observations in Cudmore’s analysis challenges traditional market dynamics. Typically, fixed income traders lead equity traders in establishing broader market direction. Bond markets, with their focus on economic fundamentals and monetary policy, often signal turns before stock markets respond.
This cycle has flipped that relationship. Equity traders are currently in the driver’s seat, with bond markets following stock market moves rather than leading them. Cudmore notes this might have also occurred during the dotcom bubble, though the pattern has been reversed for most of the intervening period.
The reason comes back to the AI theme. Equity traders understand that the fundamental catalyst for a bubble burst hasn’t emerged yet. Major technology companies continue issuing debt that credit investors eagerly purchase, but these developments follow equity market signals rather than preceding them.
This inverted leadership structure tells us something important about the current environment: the AI investment thesis remains strong enough to override traditional fixed income caution. When that changes—when bond markets start leading equities lower—it could signal the fundamental shift that marks a true turning point.
What This Means for Market Positioning
The practical implications for investors center on managing volatility within an ongoing bull market rather than trying to time an exit. Current selloffs represent normal behavior for this stage of a bubble, not warning signs to flee.
Several factors support continued strength despite increased turbulence:
The fundamental AI investment narrative hasn’t broken down. Companies continue massive capital expenditure on AI infrastructure, and that spending translates to revenue for technology providers and optimism about future productivity gains.
Positioning isn’t stretched to extremes. When everyone is already fully invested and leveraged, minor negative catalysts can trigger cascading selloffs. Current positioning suggests room for continued inflows.
Economic fundamentals remain solid. There’s no clear recession signal forcing a dramatic market reassessment. The Fed faces uncertainty about its next moves precisely because the economy isn’t showing obvious distress.
The volatility we’re experiencing looks more like a feature than a bug—a natural characteristic of this market phase rather than evidence of structural problems.
The Bigger Picture
Stepping back, what’s emerging is a more nuanced view of market bubbles than the simple “up then crash” narrative. Bubbles can have extended volatile periods before their final peaks, with significant corrections that don’t mark the end of the rally.
For the current AI-driven market, we’re likely entering that volatile stretch. Investors should expect continued turbulence, with selloffs that feel concerning in the moment but don’t represent the fundamental shift that would signal an actual top.
The catalyst for a genuine burst would involve something that undermines the core AI investment thesis—perhaps evidence that AI spending isn’t generating expected returns, or a broader economic shock that forces companies to slash capital expenditure. Until those fundamental changes emerge, volatility is just the price of admission for continued participation in the rally.
The question going forward isn’t whether to stay invested, but how to position for a market that’s increasingly turbulent while still fundamentally constructive. That might mean taking some chips off the table during rallies, maintaining higher cash positions for opportunities during selloffs, or simply accepting wider price swings as normal.
What becomes clear from examining these market dynamics is that we’re in a unique period—one where traditional signals might not apply, where volatility increases even as the underlying trend remains positive, and where patience through turbulence could matter more than trying to perfectly time entries and exits.
The AI bubble will eventually burst. But if the historical parallel holds, and if current fundamentals remain intact, we’re not there yet. This is the volatile middle game, not the endgame.