What Happened?
Citi's macro strategy team just made a bold call: U.S. stocks are officially in a bubble. But here's the twist - they're telling investors to stay invested anyway.
Citi defines a bubble as when prices rise more than two standard deviations above their long-term trend. By that measure, the current bubble started in June 2023, with a "re-entry" in June 2025. Since 1929, Citi has counted nine U.S. equity bubbles using this definition.
Dirk Willer, Citi's global head of macro strategy, explained their counterintuitive advice: "When you enter bubble territory, you buy the market. Only in 1929 did the market go straight down." Translation? History shows bubbles usually keep growing before they pop, and timing the exact top is nearly impossible.
Meanwhile, Bank of America's latest investor survey flagged AI as the top "tail risk" - a low-probability but high-impact event that could blindside markets.
Why This Matters
This puts investors in a tricky spot. On one hand, a major Wall Street bank is officially calling this a bubble - the kind of warning that usually makes people nervous. On the other hand, that same bank is saying "don't panic and sell."
Citi's reasoning? Bubbles typically inflate much longer than people expect. Willer points to capital expenditure cycles as a key indicator. He noted that in 1999, it took only about six months between the Nasdaq peak and the peak in corporate spending. Right now, companies are still heavily investing in AI infrastructure and technology, suggesting the bubble has room to run.
"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," Willer said. In other words, as long as companies keep pouring money into AI and tech infrastructure, the bubble likely continues growing.
But here's where it gets concerning: Bank of America's survey showing AI as the top tail risk suggests investors are worried about a sudden AI-related shock. That could be anything from AI not living up to the hype, to regulations cracking down, to an unforeseen technical problem.
The Bottom Line
Citi's message boils down to: Yes, we're in a bubble, but bubbles can keep inflating for years. The strategy isn't to bail out completely, but to manage risk more carefully.
For everyday investors, this means a few things:
- Don't try to time the exact market top - even the pros admit it's nearly impossible
- Stay invested but maybe don't go all-in with borrowed money or overconcentrate in the hottest stocks
- Pay attention to corporate spending trends, especially in AI and tech infrastructure - when that peaks, it could signal trouble ahead
The uncomfortable truth? We might be in a bubble that keeps growing, or we might be closer to the top than Citi thinks. Nobody really knows. What's clear is that when major banks start using the word "bubble," it's time to be more thoughtful about risk - even if you're staying in the market.
The AI tail risk is particularly interesting. Investors have poured massive amounts into AI-related stocks on the promise of revolutionary change. If that promise doesn't materialize as quickly as expected, or if something disrupts the AI story, the correction could be swift and painful.
