AI trading downturn compounded by escalating geopolitical risks! Wall Street bets that the US stock market may face a "high-volatility storm" in the summer.

The momentum trading driven by the stock market rally is losing steam, and optimistic earnings expectations are under intense scrutiny, both signaling that the market may face higher volatility this summer. As investors face increasing risk factors challenging the bullish view, index volatility is gradually rising. Crowded artificial intelligence (AI) related trades are experiencing sharp reversals, triggering massive fund rotations. Additionally, while the current market remains calm towards the escalating political tensions involving GEO Group Inc, if the situation escalates further, it could put pressure on the prevailing dovish monetary policy views. Meanwhile, there is a rapid growth in demand for risk hedging tools in the market. The Nations SkewDex index has risen to its highest level since April, which measures the cost difference between out-of-the-money put options and at-the-money options in the most liquid exchange-traded funds (ETFs) of the S&P 500 index, used to gauge market skewness - this may drive further increase in other volatility indicators. Although the VIX index, measuring market fear levels, remains below 20, still a distance away from concerning levels, the sharp volatility in individual stocks is obscuring the overall market direction. AI-related stocks, the core of momentum trading, are experiencing greater price fluctuations. However, unlike the first half of the year, the market narrative of "rising spot prices, rising volatility" seems to have disappeared. The current market trend is one of significant price declines along with continuous surge in volatility. In the technology sector, the earnings season has kicked off on a strong note, but it has not alleviated market tension. In fact, it's quite the opposite. For example, companies like ASML Holding NV ADR(ASML.US) and Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR(TSM.US) have significantly outperformed market expectations, reaffirming confidence in future demand. However, due to investors' previously high positions and overly optimistic expectations for these AI winners' stocks, the market is displaying a typical "buy the rumor, sell the fact" pattern - even when companies outperform analyst expectations and raise earnings guidance, stock prices still decline. Currently, AI is causing concerns at both ends of the trade: on one hand, mega-cap cloud computing companies and "big seven", on the other hand, semiconductor companies. The strategy of "short software stocks/mega-cap cloud computing companies, long semiconductor" has been the market mainstream this year, but this pattern was disrupted last week - software and semiconductor stocks both faced selling pressure. This indicates market worries about AI capital expenditure of mega-cap cloud computing companies and whether the AI boom can continue. As the second quarter earnings season begins, market focus is set to shift towards these mega-cap cloud computing companies. Alphabet Inc. Class C(GOOGL.US) is set to report earnings on Wednesday, followed by Microsoft Corporation(MSFT.US), Meta Platforms(META.US), and Amazon.com, Inc.(AMZN.US) next week. Wolf von Rotberg, stock strategist at J. Safra Sarasin Sustainable Asset Management, said: "Given the undisputed long-term potential of AI, we do not want to jump to conclusions prematurely. But we would like to point out that changes in the financing structure of mega-cap cloud computing companies are happening at a time when there is still uncertainty about future revenue and profit growth paths. Combined with financial leverage, income uncertainty may trigger more volatility. Von Rotberg added that these companies need to show concrete evidence that AI-related revenue is starting to grow, otherwise they may have to adjust capital expenditure targets to protect shareholder value. He said: "If this were to happen, a rebalancing of supply and demand for AI infrastructure components could trigger a partial reversal of recent price increases and lay the foundation for a more balanced but slower growth construction cycle in the coming years." Regarding the political aspects of GEO Group Inc, investors may have relegated Middle East tensions to secondary concerns, but the risk of conflict escalation remains. Recent ongoing attacks between the US and Iran have pushed WTI crude oil prices back above $80 a barrel, with overall oil price volatility sending warning signals to all asset classes. Given the overall bullish market sentiment and the high percentage of investors holding stocks, for market confidence to truly be shaken, investors need to fundamentally change their outlook on the market. But with the typical quiet trading season fast approaching, the market should not overlook tail risks. The strategy team at Bank of America Corp led by Sebastian Raedler said: "Current market pricing leaves almost no room for disappointment regarding AI, oil prices, and default risk." They believe the market is underestimating risks such as uncertainty about AI capital expenditure prospects; asymmetric risks from rising oil prices; potential residual weaknesses in the US job market; and the increasing likelihood of corporate default risks.