Despite widespread concern about AI’s existential threats, markets may still be underestimating the likelihood of a catastrophic scenario, or at least a substantial market decline.
Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, warns that investors may be more exposed to AI‑related positions than they recognize. While this works in a rising market, it can leave portfolios vulnerable if the AI bubble collapses.
Silverman likened the market’s AI exposure to “the surge protector plugged into itself,” referencing a meme about infinite power, during an appearance on Yahoo Finance’s Market Hangout.
Because AI permeates numerous sectors, Silverman noted, it has distorted traditional market indicators.
Correlation measures how closely assets move together. Low correlation means assets move independently, providing diversification opportunities and downside protection.
The CBOE three‑month implied correlation index, which forecasts expected stock correlation over the coming three months, is now near its lowest point of the year.
Silverman cautioned that the index can be misleading because the expansion of AI infrastructure and compute demand has extended the AI theme beyond technology companies into other sectors.
CBOE’s 3-month implied correlation index over the past five years. (Source: Barchart)
Silverman emphasized, “I always think of things from a risk perspective. We’re in a highly dispersed market, with low S&P 500 correlation, but that’s an illusion—it’s all the same trade across utilities, energy, politics, capex. Ultimately, it boils down to AI’s need for spending to sustain itself, and that spending is everywhere.”
She added, “Thus, the risk is highly correlated but not reflected in the measured correlation levels.”
The AI‑driven market shows no signs of slowing, leaving it vulnerable to events such as midterm elections or even unlikely market shocks, which could trigger cascading effects.
Silverman concluded, “I believe the probability of a doomsday scenario, P(doom), is far higher than the market reflects. The market appears to price only a 0.5% chance of circular financing risks and tail events, whereas I think that probability is substantially greater.”
