Authored by Chris Macintosh via InternationalMan.com,

The US equity market is a bubble.

Here is why:

In my mind, to be defined as a “bubble” the potential for a sudden “pop” needs to be there.

No matter how you define it, the probability of an extremely large drawdown in the S&P 500 has exponentially increased in the past few years.

This doesn’t mean it is a high probability — it just means the tail has gotten much fatter.

The main reason for this is index concentration is now being coupled with earnings concentration.

Firstly, passive investing has clearly contributed to the top market caps consistently outperforming over the past decade.

Passive is inherently pro-momentum. As these stocks were rewarded, it became easier for the companies to use their balance sheet for buying up competitors, seeking top talent, cheap access to debt so they could buy back more shares, etc.

It has been a snowball of positive forces for the big tech space in the past 15 years and FLOWS have been a big part of it.

However, what has notably changed in the past few years is that their actual earnings have become much more correlated.

Yes, Google and Meta at the end of the day are ad companies. Those ads are seen on the screen of an iPhone. They feed Amazon orders. And all of that runs on the cloud behind the scenes.

So in a way they have always had very correlated earnings growth, but now they are intertwining even more.

Headlines from the past 12 months to give a taste:

• NVDA to invest up to $100 billion in OpenAI in AI infrastructure tie-up

• MSFT, NVDA among backers as OpenAI closes $6.6 billion funding round

• AMZN pumps additional $4 billion into Anthropic

• META makes $14.3 billion bet on Scale

• META to spend “hundreds of billions” on AI data centers

• Apple, Nvidia in talks to join new OpenAI funding round

• Oracle, OpenAI, SoftBank partner on “Stargate” AI infrastructure JV

The Mag 7’s earnings as a percentage of the overall index has surged higher. That is because they are feeding each other’s growth now. Their balance sheets are becoming more and more intertwined while their market caps have become fueled by similar hopes.

The point here is this: passive investing led to an increase in correlation of these stocks and contributed to their outperformance. But now, AI has led to a further increase in correlation at the fundamental level.

To me, this is now what defines this market as a bubble. It is not about all-time high valuations. It is the fact that the stocks are all being pushed higher by similar forces (passive flows and buybacks) while at the fundamental level they are becoming more intertwined by the OBVIOUSLY permeable, flammable, and house-of-cards AI euphoria.

Speaking of nuts…

We have just had 27 leveraged 3x and 5x single stock ETFs filed by Volatility Shares.

• 3x AMD ETF

• 3x AMZN ETF

• 3x COIN ETF

• 3x CRCL ETF

• 3x GOOGL ETF

• 3x MSTR ETF

• 3x NVDA ETF

• 3x PLTR ETF

• 3x TSLA ETF

• 3x Bitcoin ETF

• 3x Ether ETF

• 3x Solana ETF

• 3x XRP ETF

• 3x VIX ETF

• 5x AMD ETF

• 5x AMZN ETF

• 5x COIN ETF

• 5x CRCL ETF

• 5x GOOGL ETF

• 5x MSTR ETF

• 5x NVDA ETF

• 5x PLTR ETF

• 5x TSLA ETF

• 5x Bitcoin ETF

• 5x Ether ETF

• 5x Solana ETF

• 5x XRP ETF

From a broader perspective…

These “5x bullish” ETFs are scheduled to be listed towards the end of the year.

We believe this may accurately coincide with a top in the market. Great caution is now warranted… if you’ve been with us for some time you will know that we shy away from bombastic sensationalist type of commentary and so we do not say this lightly. This is the most apprehensive we have been since the GFC for the Nasdaq and S&P 500 at least!

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As markets levitate on the same narrow set of names and the feedback loop tightens, investors would do well to step back and consider what happens when the momentum finally breaks. In our special report, Clash of the Systems: Thoughts on Investing at a Unique Point in Time, we take a hard look at the structural imbalances shaping this moment — and how to navigate the risks and opportunities they create. Read the full report here for free.