In the latter half of last week, disappointing earnings from major US technology companies intensified concerns about the AI-driven rally, and the US stock market finally experienced a long-awaited surge in volatility. Traders are now preparing for potential further shocks from this week's US midterm elections and Nvidia's earnings release later in November. On Friday, as the S&P 500 Index recorded its largest drop since June, the Chicago Board Options Exchange Volatility Index (VIX) briefly touched its highest level since April. Premiums on put options used to hedge against further market declines also rose sharply, and correlations between stocks increased as well, which may be a signal of broadening market stress. However, these indicators remain well below the levels reached in March after the US and Israel strikes on Iran.

Following disappointing results from Amazon, Alphabet, and Intel, investors are bracing for more volatility as Nvidia's earnings report approaches. Traders are also watching how the outcome of the US midterm elections could affect the Iran conflict and US domestic economic policy. "This looks more like a rotation within a bull market centered on valuation downgrades, rather than the beginning of a full-scale market deterioration," said Florian Ielpo, head of macro research at Lombard Odier Investment Management.

So far, the recent sell-off has been concentrated mainly in the technology sector, with investors pulling back from the high-flying companies that led gains this year. The S&P 500's 60-day realized volatility briefly touched its lowest level in over a year last week, as lower correlations between stocks this year, along with zero-day options traders' tendency to buy on dips and sell on rallies, helped suppress volatility. The decline in the latter half of last week occurred during an overall relatively calm year. During the tariff turmoil in April 2025, the market experienced a series of sharp swings, while in 2026 US stocks have largely shown limited reaction to surging oil prices and interest rates.

Nevertheless, even as the tech-heavy Nasdaq 100 Index posted its worst monthly performance since 2025, some investors are still betting on a market rebound. On Friday, bullish option and bull call spread trades appeared in the benchmark index as well as some of the hardest-hit tech stocks like Intel. In addition to AI concerns, traders are monitoring progress in Iran negotiations, as the outcome could determine the direction of US military action after the midterm elections and the trajectory of oil prices. Some investors appear to be betting on the war ending. Earlier last week, investors bought call spreads in Delta Air Lines, United Airlines, and General Electric, companies that could all benefit from peace in the Middle East. "The biggest uncertainty remains the de-escalation of the Iran situation, and I think we've already seen from some call spread trades in airline stocks and GE that the market is positioning for that possibility," said Christopher Jacobson, co-head of derivatives strategy at Susquehanna International Group.

Compared with corporate earnings and the Middle East situation, the US midterm elections themselves are considered less important. Over the past few weeks, the S&P 500 options market has priced this event risk essentially unchanged, implying roughly a 0.9% move on the next trading day after the election. Analysis by Brett Friedman, a Winhall Analytics/OptionMetrics contributor, on midterm election years and market volatility shows that midterm elections are typically accompanied by higher market returns and lower volatility. However, Friedman noted that in years when there is a major shift in control of Congress, returns tend to be less stable and more prone to negative outcomes.

Recent retail inflows into leveraged tech ETFs mean that semiconductor stock volatility could be amplified by ETF rebalancing flows. To maintain target leverage levels, these ETFs buy when prices rise and sell when prices fall. This sell-off could also offer some traders an opportunity to bet on a rebound. With hedge funds currently holding low net exposure, macro-level positive news could trigger significant upside volatility as investors reposition for a year-end rally. "With volatility low and hedge fund net exposure limited, call options offer an attractive way for investors to retain upside exposure before year-end," Ielpo said.