Traders Grapple With Two-Sided Tail Risk as Stocks Regain Highs

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(Bloomberg) — With equities back to their highs after a V-shaped recovery from the Iran oil shock, investors are increasingly caught between left and right tail risks: The tireless AI and semiconductor rally on one side and the gradual drag from higher energy prices on the other.

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Last week’s megacap tech earnings and Federal Reserve meeting did little to tamp down investor enthusiasm in the US. Meanwhile, the ongoing Iran conflict has oil prices climbing again, raising the specter of inflation and higher interest rates, especially in Europe. That’s keeping options volatility in the region relatively high. 

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“Markets are once again trying to look through the oil shock,” Florian Ielpo, head of macro at Lombard Odier Investment Managers, wrote in a note Friday. “Despite Brent moving sharply higher, equities have stopped reacting mechanically to oil, as earnings momentum remains strong enough to absorb higher yields and geopolitical risk.”  

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US stocks have largely shrugged off the higher oil price as the earnings season picked up steam in mid-April, but there is still concern that this could change quickly, especially as short-term, daily sensitivity to oil prices hasn’t shifted materially.

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Tech Goldilocks

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Results from tech giants were mostly positive, with investors cheering better-than-expected earnings but nonplussed by huge capital spending plans. While some of the biggest names such as Meta Platforms Inc. stumbled, other tech stocks kept indexes moving higher. So investors are still playing upside via call options, keeping the Nasdaq 100 Index call skew flat as they chase the rally. 

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BBVA strategist Michalis Onisiforou noted recently that “the rally’s concentration in semiconductors, while narrow, is often a precursor to broader market participation rather than a sign of exhaustion.”  

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Given the extreme upside momentum in those stocks since April 8, some investors will be anticipating a period of consolidation with the pace of gains viewed as unsustainable without an additional catalyst. The next big hurdle to jump will be Nvidia Corp.’s earnings after the market close on May 20, which is shaping up as the biggest event — not just for tech stocks, but the broader market.

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Europe-US Volatility

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Volatility in European benchmark indexes is holding stubbornly higher than in the US, supported by the rising oil prices. Europe is much more sensitive to oil and natural gas supply upsets, though US gasoline, diesel and jet fuel prices are surging as well lately.

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“The market is faced with higher oil prices, higher yields and an uncertain timeline regarding the opening of the Strait of Hormuz,” said Andy Kent, broker at Kyte. “When we combine these factors, the European equity derivatives market in particular remains in a regime of implied vols significantly higher than realized.”

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Reopening the strait could unleash a sharp rally in underowned European stocks, amplified by dealer gamma positioning, while failed talks and another leg higher in oil prices risk triggering a rapid reversal as the market reprices the energy shock. Bank of America Corp. strategists noted that 2026 is shaping up to see an unusually high number of single-stock fragility shocks.