Citi Strategists Say U.S. Equities Are in a Bubble—And Still a Buy, Bank of America Survey Flags AI as Top Tail Risk

U.S. stocks have entered bubble territory, but investors should stay invested and manage risk more aggressively, according to Citi’s macro team. On Citi Research’s “Markets Edition: The Bubble Playbook ” podcast, recorded earlier this month, Dirk Willer, Citi’s global head of macro strategy and asset allocation, defined how the bank defines a bubble. “If something goes up by more than two standard deviations against the long-term trend in real terms, we call it a bubble. We use prices for that, not valuation.”

Applying that rule, Citi counts nine historical U.S. equity bubbles since 1929 and says the current bubble began in June 2023, with a re-entry in June 2025. But Citi suggests investing in a manner that may be counter to your intuition and running for the exits. “The first is, when you enter bubble territory, you buy the market. Only in 1929 did the market go straight down,” Willer said. He pointed out the difficulty in attempting to predict how long an inflating bubble will last. 

Willer added, “We don’t think we’re close to the end,” citing the typical lag between an equity peak and a capex peak.  He used semiconductor sales to highlight his point. “In 1999, for example, it only took a bit more than six months between the peak in Nasdaq and the peak in the capex cycle. And so therefore, if you call the top in the market now, you have to believe that the capex story is over within half a year plus, which seems really extremely short. “

A separate gauge of professional sentiment underscores investor tension around the perceived AI bubble. A Bank of America survey recently reported a record number of fund managers believe AI stocks are in a bubble.  Bloomberg reported, “about 54% of participants indicated tech stocks were looking too expensive” and that fears of broad overvaluation had reached a peak. 

Citi’s prescription is to embrace the trend but tighten the seatbelt. Adam Pickett, who leads global quant macro strategy at Citi, highlighted two practical tripwires. First, the firm’s multi-factor “Polls Indicator”—covering positioning, liquidity, leverage, and stress—becomes a hard stop when it turns red. “When this indicator goes above 17, that’s a line in the sand to get out of risk,” he said, noting backtests that reduced maximum drawdowns by roughly a third and improved the strategy’s information ratio. 

Second, according to Pickett, in characteristically narrow-leadership bubbles, watch “the generals”: if three of the seven largest stocks break below their 200-day moving averages, “it leads the overall index lower.” Neither signal has triggered, he said.

Policy also complicates the script, according to Willer. Historically, the Federal Reserve tightens into bubbles; cuts are “pretty much unheard of,” he said. Liquidity also matters. He pointed to the late-1999 Y2K-related infusion and its withdrawal in early 2000 as relevant to timing the peak then. Today’s backdrop looks different. A softer labor market could encourage a more dovish Fed, extending liquidity and, by Citi’s telling, potentially elongating the cycle. “Bubbles do need liquidity,” Willer added.

For investors weighing froth against momentum, the message from Citi is finely balanced: acknowledge the bubble, ride it with discipline, and respect the guardrails. Meanwhile, the BofA survey’s warning on AI exuberance shows the narrative has already reached the mainstream of global fund managers.