AI takes turns to hit various industries, Wall Street turns to

# Ye Zhen

The AI-driven "whack-a-mole" sell-off has caught Wall Street off guard. The S&P 500 has risen just 1% this year, but beneath this calm surface, stock-specific divergence has hit its widest level since 2009. IBM plunged 13% in a single day, and software stocks have been hit one after another, forcing institutional investors to turn to complex hedging tools such as dispersion trades. However, analysts warn that these defensive strategies could backfire if systemic risk strikes.

U.S. individual stocks have been repeatedly battered by AI-related shocks, and Wall Street is shifting toward more sophisticated options and hedging strategies to navigate this unpredictable "whack-a-mole" selling wave.

This Monday, a 10,000-word blog post painted a pessimistic picture of AI eroding consumption by pushing unemployment higher, triggering a fresh sell-off in software and private equity-related sectors. Hours later, Anthropic announced its new-generation Claude Code tool could replace a major programming language, and IBM’s stock crashed 13%—its biggest one-day drop in more than 25 years. Mike O’Rourke of Jones Trading said that in such a volatile environment, stock picking has become an exercise in "avoiding landmines."

So far this year, the S&P 500 has gained only about 1%, remaining relatively stable at the index level, while violent swings at the single-stock level have reached the widest divergence since the 2009 global financial crisis. This pattern of "calm macro, turbulent micro" is driving institutional investors to accelerate into dispersion trades and complex hedging tools, with participants ranging from hedge funds to pension funds.

## Index calm masks extreme stock volatility, divergence widest in 16 years

Barclays analysts noted that the S&P 500 is up only about 1% year-to-date, with its trading range narrowing to just 2.7%—"the narrowest range in nearly a century outside of 1964 and 1966." Yet this macro-level calm conceals extreme micro-level volatility.

Market maker Citadel Securities pointed out last week that the gap between single-stock volatility and the relatively stable S&P 500 has widened to the most extreme level since the 2009 financial crisis.

Charles Lemonides, founder of ValueWorks, described the phenomenon more vividly: "For years, all stocks moved in lockstep, but recently moves have been extremely violent in both directions, with breathtaking swings."

## Dispersion trades surge, spreading from hedge funds to pensions

Faced with this market structure, **dispersion trades** have become a highly sought-after strategy on Wall Street. The approach involves buying single-stock volatility while selling index volatility, capturing the spread between large individual-stock swings and a stable index.

Anshul Gupta, head of quantitative investment strategies at Barclays, said the amount of money chasing dispersion trades is "larger than it has ever been." He noted that participation from fast-money accounts such as hedge funds has risen sharply, and more importantly, the strategy has expanded far beyond hedge funds, with asset managers and pension funds growing increasingly active.

Jason Goldberg, senior portfolio manager and dispersion trading specialist at Capstone Investment Advisors, said the ratio of near-term single-stock option prices to index option prices has climbed significantly. "The options market is telling you it expects a highly dispersed environment."

Manish Kabra, head of U.S. equity strategy at Société Générale, also revealed that wealth management clients have been inquiring about dispersion products to position for the divergence between AI winners and losers in the tech sector. "Someone will always win—we just don’t know who—but we want to capture absolute dispersion returns," Kabra said.

## Institutions rush for downside protection; JPMorgan launches "Triple Edge" hedging framework

Meanwhile, demand for broad portfolio defense is heating up. Charlie McElligott, executive director of global equity derivatives at Nomura, said institutional clients’ hedging demand has been "nonstop" amid a "flood of negative catalysts" and a continuing "market doomsday whack-a-mole game."

McElligott said Nomura clients are accelerating purchases of put options on the Invesco Senior Loan ETF and the iShares High Yield Corporate Bond ETF—both of which count numerous software companies among their top 10 holdings.

This week, JPMorgan pushed its so-called **Triple Edge hedging framework** in a client note, tailored for investors seeking a "disciplined approach to periodic pullbacks." The bank recommended buying "convex" short-dated S&P 500 put options when volatility rises—options that gain rapidly during sharp sudden drops but are more cost-effective in calm markets.

Lisa Shalett, head of the global investment office at Morgan Stanley Wealth Management, noted that traders appear to be shorting consumer discretionary stocks while going long industrials—a pair trade that reflects avoidance of softening consumption and bets on beneficiaries of large language model infrastructure spending.

## Dispersion trades are not foolproof; systemic risk remains a threat

Despite dispersion trades’ current popularity, insiders remain alert to their hidden risks. Jasmine Yeo, fund manager at Ruffer, warned that dispersion strategies could fail if the market faces broader systemic shocks—such as escalating geopolitical risks or a worsening trade war—that trigger a broad-based sell-off across stocks.

In that scenario, investors betting on dispersion may be forced to buy index-level volatility protection, which could in turn amplify market-wide selling pressure and create a negative feedback loop. This means the effectiveness of today’s elaborate defensive strategies ultimately depends on whether AI shocks remain "structural divergence" rather than turning into a "systemic crash."

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