While market pricing for a rate hike at this week's Federal Reserve FOMC meeting has climbed to nearly 90%, the S&P 500 and Nasdaq Composite still closed last Friday with strong resilience, gaining 0.86% and 0.96% respectively, with falling oil prices driven by eased Middle East geopolitical tensions providing key support. On Friday, September 11, U.S. August headline CPI rose 0.4% month-over-month and core CPI rose 0.3%, both accelerating from July, but the year-over-year headline figure held steady at 3.4% while core inflation actually cooled to 2.4%, suggesting a more accurate read is that short-term price pressures have rebounded rather than all inflation metrics deteriorating across the board.

In the view of some seasoned Wall Street analysts, the stock market's resilience amid surging long-dated Treasury yields, heightened rate-hike expectations from hotter inflation, and tense geopolitical maneuvering is not at odds with the demand for hedging. A portion of veteran traders and investors still want to preserve equity upside, but they diverge on whether risk will be released through "slow valuation compression" or a "sudden leveraged liquidation." The former drives conditional protection against gradual declines, while the latter drives demand for instruments with strong convexity like VIX call options—reflecting a divergence in risk management approaches rather than a consensus bet that the U.S. equity bull market, or the global one, is over.

AI bull market enters its earnings test as global capital buys insurance for two types of declines

Following the slightly hotter-than-expected CPI print, Goldman Sachs shifted from predicting the Fed would hold steady at the September meeting to betting on a 25-basis-point hike this week, while taking a more cautious stance on the path beyond September. However, in a research note released over the weekend, the bank laid out its "earnings trump everything" bullish thesis for the U.S. stock market's long-term uptrend since ChatGPT took the world by storm in 2022—projecting S&P 500 earnings per share to reach $340 by 2026, implying a 24% year-over-year surge from an already elevated base, and further to $385 by 2027, a 13% gain. Meanwhile, the forward price-to-earnings ratio has compressed from 22x at the start of the year to 19x, indicating that the interest-rate headwind has already been reflected through valuation compression.

Goldman's historical sample shows that after the start of seven rate-hike cycles, the S&P 500 has averaged a 2% decline over three months but a 9% gain over twelve months. These figures do not yet support the notion that "once the Fed starts hiking, the bull market is doomed," but they also cannot 100% prove future returns will replicate history. The bank emphasized in its note that what truly matters is whether the earnings delivery trend can offset further valuation declines. For the current equity bull market, a single Fed rate hike itself is not the worrying factor—at least historical data shows that what truly threatens bulls is a full rate-hike cycle, not individual actions.

Data compiled by institutions details the 12 bear markets since 1945 where the S&P 500 fell 20% or more, plus four additional declines of 18% to 20% that approached bear-market territory. Among these, six bear markets occurred after rate-hike cycles with the economy subsequently sliding into recession; three followed hikes without an accompanying recession; one coincided with the COVID-era recession; and only two involved neither rate hikes nor a recession. In this comparison, a rate-hike cycle is defined as at least two increases totaling 100 basis points or more.

Goldman analysts collectively maintain that AI can provide a source of sustained, robust earnings growth, and the "AI trumps everything" bullish logic remains intact—namely, the powerful thesis that "the AI theme comprehensively overrides all negative factors including inflation, geopolitical crises, and surging Treasury yields." From an actual AI application and data center engineering perspective, future, more capable AI agent-based workflows—if they take on more long-horizon tasks, multi-round reasoning, and nearly endless high-performance tool calls—will continue to explosively expand demand for core computing, DRAM/HBM memory, data center NAND storage systems, server CPUs, high-performance networking equipment, and high-speed optical interconnects across a range of AI data center infrastructure resources. From an investment angle, these workloads must translate into paid orders, actual deliveries, data-center-level equipment utilization, and cash collections.

Last Friday's U.S. market saw Dell and Hewlett Packard Enterprise shares surge roughly 12% each, reflecting that the market remains willing to chase computing growth opportunities backed by corporate earnings. But Goldman also warned that capital expenditures simultaneously bring depreciation, financing, power, and maintenance costs—and between computing demand growth and shareholder return growth, there remains the test of profit margins and return on invested capital. The bank further noted that the reason and speed of rising rates matter more than any single rate level: if yields rise mainly due to improving growth and productivity, corporate earnings may provide a buffer; if driven primarily by energy supply shocks, inflation risk premia, or fiscal financing pressures, it could simultaneously lift discount rates, squeeze margins, and weaken consumption. Its assessment of large companies' long-term fixed-rate debt implies existing debt costs transmit slowly, but that does not eliminate pressure from new AI project financing and future refinancing needs.

The global AI supply chain can share in demand expansion but will still diverge markedly based on financing structures, energy costs, and customer concentration. The U.S. equity options market, meanwhile, is signaling that even if long-term earnings views remain unchanged, positions could face two distinctly different decline paths. A VIX around 15.5 does not automatically mean protection is cheap—if realized market volatility is even lower, the volatility premium paid can still be elevated; short-dated puts can lose time value if declines are insufficient or too slow. Bets on "index down, VIX down" via double binary options require meeting contract conditions simultaneously and cannot substitute for crash insurance. The block purchases of over 275,000 October and November VIX call options over the past few weeks reflect another cohort of Wall Street professionals' demand for protection against sudden shocks.

For the AI super-bull market still sweeping global equities, a more substantiated view is that the trajectory of better-than-expected, robust AI-driven earnings growth can still support the long-term uptrend, but institutional investors are now pricing valuation compression and liquidity shocks separately. Whether the bull market continues depends on the trajectory of growth delivery, not on whether risk is being ignored.

Crash protection or slow-decline protection? Hedgers diverge on whether to guard against a sudden plunge or a gradual grind lower

With rising rates and oil prices stalling the equity rally, investors seeking hedges are split: should they guard against a fast selloff or a slow grind down? Several factors have recently worked against equity hedgers. The S&P 500 has mostly traded sideways since late May, and in several phases this year, realized volatility during up moves has exceeded that of down moves, producing what market jargon calls "up price, up vol." Smaller realized moves—especially on the downside—have made some traders more reluctant to pay up for outright short-dated puts as protection, because if the decline isn't big enough, the premium decays over time.

So while some traders and investors are buying CBOE Volatility Index calls or S&P 500 puts, others are taking more creative approaches to positioning for a downturn. Antoine Porcheret, head of institutional structured products for UK, Europe, Middle East, and Africa at Citigroup, said: "As the 'up price, up vol' regime reverses, we're seeing some trades positioning for 'down price, down vol'—for example, via double binaries betting on the S&P 500 falling while the VIX declines, laying out for a slow grind lower." As the chart above shows, the S&P 500 options premium—the VIX risk premium—remains near the top of its range since 2022.

Over the past few years, "slow grind" has been a popular phrase and a popular trade idea, as some professional traders and investors view a gentle selloff rather than a sudden plunge as a scenario worth hedging and speculating on. These double binary bets on the market moving lower while volatility falls reflect the general lack of shock and surprise in AI themes and geopolitical risks right now, which makes the case for holding long volatility less clear-cut. Even with the VIX around 15.5—below its four-year average—it remains near the upper end of its range relative to realized market volatility. Events like the U.S. nonfarm payrolls report, which once frequently triggered large market moves, now tend to quickly fade unless results are genuinely shocking.

However, while economic-news-driven risk has diminished, equities still appear highly sensitive to rates. All eyes are therefore on this week's Fed decision, with market expectations leaning toward a hike. The chart above summarizes the correlation between the S&P 500 and rate moves. With long-term Treasury yields reaching multi-year highs, options structures betting on stocks falling and rates rising—a stagflation-style payoff—attracted inflows earlier this year. JPMorgan strategists have recently promoted double binaries to leverage this scenario into year-end.

Of course, there are still signs that traders and investors are building convexity-heavy positions, betting volatility could spike amid multiple threats to the equity rally. Beyond rising rates, these threats include elevated oil prices amid the ongoing U.S.-Iran conflict, and developments supporting a stronger yen—which could trigger carry-trade unwinds similar to the August 2024 stock slump and volatility spike. As the chart above shows, demand for VIX calls is robust, the "vol of vol" skew sits at elevated levels, and measures of convexity pricing are rich. This has led some traders and investors to firmly choose direct VIX call buying as their hedge, while the broad market demand for "vol of vol" convexity can be seen in the index's call skew. Over the past few weeks, October and November VIX call options purchased via block trades have totaled over 275,000 contracts.

Porcheret noted: "The dominant theme in the flows has been hedging activity. Direct long-vol trades are more cautious—for example, buying knock-in forward-start variance swaps, where you only gain vol exposure if the market rallies first." And while some leveraged bets remain pricey, seasoned Wall Street traders and investors are still willing to stand on the other side of the trade, seeking to collect premium. Adrien Geliot, CEO of Premialab, said: "We're actually seeing demand on both ends: increased interest in systematic protection and convexity, while still continuing to allocate to short-vol strategies to harvest carry and enhance returns. The key distinction is increasingly about portfolio objectives and implementation methods, rather than a wholesale market shift from short to long volatility."