Wall Street may be facing its most turbulent earnings season in years!

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Investors are once again preparing for major stock market swings during earnings season, speculating at high costs as the market shows weakness after reaching record highs.

According to media reports on Monday, options data for S&P 500 constituent stocks indicates that investors expect an average price swing of 4.7% after earnings releases, close to the highest level at the start of an earnings season since 2022, set in July.

The sharp rise in options prices reflects expectations of extreme volatility in individual stocks. This surge in volatility expectations comes as the market faces multiple challenges, with investors increasingly concerned about a government shutdown, the impact of trade policies on corporate profits, and the risk of an AI stock bubble.

Mandy Xu, Head of Derivatives Market Intelligence at Cboe Global Markets, said:

At the individual stock level, a lot of volatility is being priced in. The market rally has mainly been driven by AI and tech stocks, but the valuations and forward earnings prospects of these stocks are facing growing skepticism.

Citi strategists noted that, unlike last quarter, options prices have already risen in anticipation of this volatility. Investors expect stock-specific factors to drive volatility in the near term, while a government shutdown means the market is in a macro catalyst vacuum.

Option Market Reflects Record Volatility Expectations

According to data compiled by Bloomberg, the implied average price swing of 4.7% in S&P 500 component stock options is the same as the level in July, when expected volatility at the start of earnings season, marked by JPMorgan’s results, reached its highest since 2022.

UBS strategists said that actual share price volatility following US earnings last quarter peaked and has been rising since 2021, as has been the case in Europe. Citi pointed out that stock correlations are extremely low, with both realized and implied volatilities close to the lowest levels in at least a decade.

Citi equity and derivatives trading strategist Vishal Vivek said:

A government shutdown means we're in a macro catalyst vacuum, and at least from the perspective of single-stock options, positions are already very tight. These factors set up an interesting scenario for late October and early November.

AI and Tech Stocks Become the Focus of Volatility

Market watchers have noted that single-stock skew is flatter than the index, with traders more inclined to chase surges in individual stocks, especially those related to AI. One factor supporting a modest rise in index volatility is low correlation. Even though individual stocks are more volatile than the S&P 500 index, they move in different directions, helping to keep index volatility moderate.

Cboe analyst Xu said:

This earnings season will be key to whether the AI theme continues to dominate the market. The rally has been driven by soaring AI and tech stocks, but skepticism about their valuations and earnings outlook is mounting.

This quarter, consumer discretionary, technology, and healthcare companies are expected to see some of the biggest swings. According to data compiled by Bloomberg, implied volatility for consumer discretionary names at the start of earnings season reached its highest level since 2020. While materials stocks showed lower figures, it's still a three-year high for that sector.

Market Repricing Reflects "Violent" Swings

Alex Kosoglyadov, Managing Director of Global Equities Derivatives at Nomura Holdings, said that major swings in large stocks such as Oracle and AMD have already led the options market to reprice other individual stocks.

"You're seeing truly violent moves in some large-cap stocks," he said. "It shows the power of the market; people really don't want to short volatility—you could face some sort of earnings surprise and massive price moves."

JPMorgan pointed out in August that investors seeking to build discrete baskets may be watching for post-earnings swings to hunt for bargains, as implied volatility often collapses, an effect particularly evident after last earnings season. Options traders have already driven up implied volatility for S&P 500 components, likely reflecting bets on Mag7 stocks amid continued focus on AI and large tech names.

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