“When will the ‘AI-only rally’ reverse? Nomura offers three catalysts: US-Iran talks break down, US-Iran talks go too well, and call options are no longer being bought.”

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The current market consensus is highly concentrated, with AI technology stocks taking the lead. However, Nomura strategists warn that this extremely crowded positioning lays the groundwork for intense reversals.

Nomura cross-asset strategist Charlie McElligott points out in his latest report that the current macro consensus in the market is unprecedentedly unified: betting on higher interest rates, going long on the dollar, and heavily investing in AI technology. Since March 30, the S&P 500 Index has risen 19%, with just 10 stocks contributing 69% of the gains.

Investors are forced to chase upward by buying call options, while demand for put options has nearly disappeared—call option skew for both the S&P 500 and Nasdaq 100 has reached the historical 100th percentile, while put option skew has dropped to the 0th percentile. McElligott characterizes this setup as "the only worrying tail risk is a right-tail blow-off in AI trades."

This extremely concentrated positioning makes the market highly sensitive to specific catalysts. McElligott clearly outlines three major scenarios that could trigger a "crowded reversal" and "momentum collapse," including the breakdown of US-Iran nuclear talks, reaching an actual agreement, or no external event at all—the "reflexive" path of self-correction by the market. Last Wednesday's mild pullbacks in tech and energy stocks already showed a preliminary cross-asset linkage effect when reversals begin.

Consensus is extremely crowded, AI theme stands out

The market scenario described by McElligott is a rarely seen highly consistent macro bet in recent years. The market generally expects interest rates to remain high, with G10 nations witnessing strong bear flattening over the past month and a half; front-end rates are being "paid up" to reflect the central banks' hawkish repricing; dollar long positions are based on the logic of the US being the "cleanest dirty shirt"—the US economy is believed to be closer to overheating than recession.

The three main pillars supporting this view are: a wave of capital spending driven by AI and the "Big Beautiful Act" (OBBA); the strongest corporate earnings growth season since Q4 2021, with earnings upgrades at the 99th percentile since 2000; and the energy security advantage the US holds as a net exporter of oil and gas—rising energy prices have a pro-cyclical effect on the US economy. Overall, Nomura tracks US nominal GDP growth at around 7.1%.

Against this backdrop, the "AI semiconductors-energy 50/50 barbell combination" has been the brightest strategy of the year, with a return of 48% year-to-date, a Sharpe ratio of 5.5, and a maximum drawdown of only -4.0%, far outperforming the S&P 500's approximately 10% return, 1.9 Sharpe ratio, and -8.9% maximum drawdown over the same period.

Catalyst One: Breakdown of US-Iran Talks

McElligott's first reversal catalyst is a "no deal" outcome in US-Iran nuclear talks.

He notes that a breakdown would revive the "doom loop" stemming from the "VaR shock" seen in late February to early March this year: oil and energy supply shocks push up inflation expectations, forcing central banks to more hawkish repricing, triggering cross-asset turbulence—because "all assets and beta positioning are essentially short interest rate volatility."

Along this path, energy-importing countries would take the lead, with interest rates rising first, followed by demand destruction and growth shocks. Central banks would be forced to hike rates during a supply shock, which often ends badly. McElligott notes the irony that inflation must "worsen first" before bonds can resume their hedging function, and only then can stock-bond correlations possibly reverse.

Catalyst Two: Reaching an Actual US-Iran Agreement

The second catalyst seems to be the opposite of the first, but McElligott believes its market impact could similarly overturn current consensus.

Conventional wisdom suggests that the Iran nuclear deal's success and reopening of the Strait of Hormuz would be a clear signal for "risk-on," extending the current momentum and arbitrage structure. However, McElligott makes it clear that he increasingly believes a real agreement would trigger the opposite result in "the most counterintuitive way": falling energy prices relieve inflation tail risks, central banks are forced to reprice dovishly, yields fall, and the dollar weakens, severely hurting paying positions.

Meanwhile, the long-ignored energy-importing countries (i.e., "the rest of the world") would see growth prospects rekindle, triggering a large-scale "relief rally"—financial conditions would ease as rates fall and the dollar weakens, underweighted cyclical stocks, value stocks, and emerging market stocks would experience a short squeeze. The current "AI-barbell" combination would risk becoming the "source of funds," as capital rotates to assets more sensitive to economic activity.

Catalyst Three: No Event Required, Market Self-Correction

The third path relies on no external catalyst, but stems from the "reflexivity" of modern market structure—price itself alters fundamentals, that is, "price is news."

McElligott notes that the ongoing surge in call option demand for large AI tech stocks and semiconductors has created an abnormal "spot up, volatility up" pattern, to the point where he and a client joked that VIX futures move almost identically on a daily basis to SMH, DRAM, QQQ, etc. In the current market, volatility's only source is AI-related upside demand, with almost zero demand for downside protection.

He lists three signal levels to watch: first, at-the-money volatility begins to fall; second, call option skew flattens—after such large rallies, demand for out-of-the-money calls fades; third, skew steepens, meaning put options strengthen relative to calls.

Once any of these signals reverses, it will reveal the "absorption" level among recent buyers of tech stocks, and whether incremental buyers still support upside demand. McElligott warns that "spot up, volatility up" patterns tend to end in "chaos"—collapsing under the weight of enormous delta positions, with small profit-taking morphing into forced mechanical selling.

Leveraged ETFs as Amplifiers, Last Wednesday Was a Preview

McElligott specifically points to the potential amplifying effect of leveraged ETFs. Nomura tracks the total size of leveraged ETFs currently at historical highs, about $187 billion, 87% of which are concentrated in the "AI tech leadership" theme—$67 billion in tech, $39 billion in semiconductors, $26.2 billion in "Mag7+" related products, and these largest mega-cap cloud, semiconductor, and memory companies represent over 41% of the S&P 500 index weighting, and over 52% in Nasdaq 100.

If the AI tech theme starts to weaken persistently, leveraged ETF rebalancing mechanisms will operate indiscriminately in the opposite direction—the more they fall, the more they sell, mechanically amplifying sell pressure.

Last Wednesday's trading provided a "preview": mild pullbacks in tech and energy stocks instantly triggered clear cross-asset linkages—equal-weight indices outperformed cap-weighted indices, popular shorts beat crowded longs, value beat growth, Dow outperformed Nasdaq, Europe outperformed US stocks. McElligott characterizes this as a sample of "how reversals can start quietly without a catalyst" and notes that the past week saw several intermittent signals of cross-asset "crowded reversals."

Risk Warning and DisclaimerThe market is risky, investment should be cautious. This article does not constitute personal investment advice and does not take into account any individual's specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their individual circumstances. Investing based on this is at your own risk. ```