It’s clear enough that previously “oblivious” equities reached the limit this month in terms of how much rates re-pricing and geopolitical tension stocks can absorb with alacrity.

The S&P came into Friday on track for its worst showing since Jerome Powell conceded, on October 19, that the US economy’s demonstrable resilience suggested Fed policy settings weren’t especially onerous (“not too tight,” as he put it). Critics spent the next four months asking what happened to that Jay Powell.

Stocks haven’t “had many challenging weeks in 2024,” JonesTrading’s Mike O’Rourke remarked. “A couple of weeks ago was the only other time the index was down 2% week-to-date going into Friday.”

~5% hardly counts as a proper “drawdown,” but again, it does suggest equities’ willingness and/or capacity to ignore the hawkish about-face in rate-cut pricing was exhausted this month.

At the same time, the frequency of war-related “tape bombs” is likely contributing to a nascent shift in the equity vol complex, where Pavlov was conspicuously absent this week.

“I gotta be honest: The post-VIXperation trade has seen US equities index iVol, skew and vol-of-vol stay far stickier than expected,” Nomura’s Charlie McElligott said.

For now, short vol flows (i.e., the “muscle memory” that says you sell vol expansions ahead of the imminent “mean reversion”) are being offset by unusually persistent demand for downside hedges. Part of that’s exposure builds: People finally have something to hedge. Part of it’s the gap risk from incessant Mideast escalations.

The figure above, from Nomura, shows that through mid-week, the average down day in April exceeded the average index move on up days. That hasn’t happened since October.

“The risk environment’s far more two-way than at any time in recent memory,” McElligott went on. “You can see it in the way the tape trades these past few days and you can see it in daily changes.”

Whether this is a durable regime shift remains to be seen. And you could anyway argue a pullback’s healthy considering it was long overdue.

But if this is the “catch down” trade equity bears have warned about for months, the multiple compression “implied” by the forward curve (i.e., the de-rating that would bring index multiples “in line” with market pricing for Fed cuts in 2024) suggests a very long way down for equities. As O’Rourke put it, “the market will be lucky if it gets two [Fed] cuts before year end.”

There was already a lot riding on big-tech earnings in the US. Now those reports loom even larger.