JPMorgan: Stock Price Volatility of Six Tech Giants Exceeds Expectations for the First Time Since ChatGPT's Launch

As reported by Marketwatch, strategists at JPMorgan pointed out that, excluding NVIDIA which has yet to release its earnings, the remaining six of the 'Magnificent Seven' tech companies saw their stock price volatility exceed the implied expectations from the options market after their earnings announcements. This is the first occurrence since the launch of ChatGPT at the end of 2022, which sparked an AI investment frenzy.

The term 'implied volatility' refers to the expected price movement of a stock after earnings, calculated based on the prices of options before the earnings release. This time, the actual volatility of the six tech giants all surpassed expectations, reflecting the market impact of earnings results and corporate outlooks, which far exceeded investors' initial pricing.

However, these tech stocks did not rise in unison but instead exhibited dramatic fluctuations in different directions. Tesla's stock plummeted by approximately 15% after its earnings report, while Microsoft's stock soared by around 16%. This highlights that investors are reassessing the differences among companies in terms of AI investment, capital expenditure, and profit growth.

JPMorgan noted that the strong reactions to earnings reports from large-cap tech stocks, combined with the collapse of the hedge fund Situational Awareness and the policy uncertainty introduced by the new Federal Reserve Chairman's press conference, have collectively pushed the dispersion of individual stock returns in the U.S. market to its highest level in nearly 35 years.

'Stock dispersion' measures the degree of divergence in the performance of different stocks over the same period. Even if the overall volatility of major indices appears limited, some component stocks may experience significant gains while others suffer substantial losses. An increase in dispersion typically indicates that the market is no longer being driven by a single theme, and the importance of stock selection, earnings performance, and sector rotation is on the rise.

JPMorgan's strategists warn that while strong capital flows during the tech stock bubble period may offset market headwinds over a longer period, short-term pullbacks and capital shifts toward value stocks are not uncommon. In the current environment of heightened individual stock volatility and accelerated sector rotation, investors may consider using options to limit downside risk.

Regarding healthcare stocks, JPMorgan proposed a strategy of establishing a bull call spread using the healthcare ETF (XLV-US). Under specific price and expiration conditions, such a trade could potentially yield a maximum return of approximately 4 dollars for every 1 dollar invested. Compared to directly buying stocks, this approach allows for better control of investment costs and maximum losses.

A bull call spread typically involves buying a call option with a lower strike price while simultaneously selling a call option with the same expiration date but a higher strike price. The premium received from selling the higher strike call option can reduce the overall cost of the trade, but it also limits the potential profit.

Notably, JPMorgan believes that healthcare stocks currently show signs of being overbought. Based on the bank's comprehensive bubble risk indicator, which calculates asset returns, volatility, price momentum, and market fragility, healthcare ranks highest among all industries and markets. Therefore, JPMorgan recommends participating through risk-limited options spreads rather than directly chasing high prices in related stocks.

For the S&P 500 Index (SPX-US), JPMorgan suggests considering bear put spreads or bear put spread strategies to hedge against the possibility of a gradual decline in the index.

Strategists noted that the market is currently prone to sector rotation, and the skew of put option volatility is steep. By using spread combinations, investors can reduce hedging costs while maintaining a certain degree of downside protection.