The enthusiasm for AI is cooling, and macro risks are heating up! U.S. stock traders are gearing up for the "August storm," with Goldman Sachs betting on a resurgence of volatility.

Notably, for months now, the S&P 500 index has maintained a narrow trading range, even as individual stocks have experienced wild and dramatic fluctuations that largely offset each other. However, traders are preparing for a shift in this situation. An investment blueprint is beginning to emerge: traders are hedging against the overall coordinated volatility of the market while betting that the volatility of individual stocks will decrease. This so-called reverse dispersion trading has been identified by Goldman Sachs as one of the best strategies to navigate the current market. With earnings seasonwhich is typically a time when investors react more strongly to company-specific news and pay less attention to macro headlinesnow more than halfway through, investors are redirecting their focus back to macro risks. From the Iran war, serious divisions within the Federal Reserve, to persistent inflation pressures, macro risks are continuously emerging. Brent Kochuba, founder of the options platform SpotGamma, stated, The macro situation is deteriorating. Previously, there was a belief that AI could guide us out of this predicament, but that notion is now starting to be questioned. The dispersion degree indicator has retreated from historical highs. For months, reverse dispersion trading has struggled, as correlations among individual stocks have remained close to historical lows, while benchmark indices have been trapped in a narrow trading range. Although the overall landscape remains unchanged, concerns over the macro economy have begun to quietly brew. Data from the Chicago Board Options Exchange indicates that the indicator measuring the expected dispersion of large-cap stocks for the month of January recently reached its highest level since 2020, and has seen declines on six of the past seven trading days. During the same period, the measure of implied correlation among the top 50 stocks in the S&P 500 index, which hit a historical low earlier this month, is now experiencing its third consecutive week of increases. It is certain that none of this is an omen of the apocalypse, as the Chicago Board Options Exchange Volatility Index (Cboe VIX Index) remains well below the key level of 20 that typically signals escalating market stress. Traders at RBC Capital Markets liken the stock markets high dispersion, low correlation characteristics to a water bird gliding on the surface of the water. Matthew Davis, head of derivatives trading at the bank, said, Its like a duck quietly floating on the water, but its feet are paddling furiously underneath. This dynamic has provided very favorable returns for institutions participating in dispersion trading. However, as the calendar flips to Augusthistorically one of the most volatile months for U.S. stocks along with Septemberdemand for protective strategies among investors is rising. Earlier this week, the skew measure for standardized three-month put/call options on the S&P 500 index surged to its highest level since April. Goldman traders, including Gael Haffif, wrote in a report to clients this week, As macro uncertainty continues to loom, the market is also digesting the fervor for momentum strategies, and the likelihood of experiencing a correlated event is coming into focus. Demand for downside protection has increased in July. Vuk Vukovic, chief investment officer of Oraclum Capital, holds short-term put options on the S&P 500 index, which could yield profits if the index declines significantly. He stated in a phone interview, You dont know if this will happen next month. It might happen two years from now, but you have to be prepared. So far, the market remains steady, with the S&P 500 index just 2.3% off its historic high set in June. However, some traders preparing for increased macro volatility are beginning to draw parallels to August 2024, when a surprise interest rate hike in Japan triggered unwinding of yen carry trades, sending the VIX index above 65 and bringing the S&P 500 index to its lowest point in three months. Jamie Sanders, portfolio manager at J. Hendricks Henderson, remarked that he would benefit from his current portfolio configuration should correlations rise. Sanders said on the phone, If we do indeed encounter significant macro washout or a sharp downturn in AI trends, we could actually see that correlation rebound. Some macro event, perhaps an impact from the Federal Reserve or something driven by AI, could significantly boost index volatility.