J.P. Morgan: US Equity Volatility Cools but Crowding Risks Remain
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J.P. Morgan projects that US equity volatility will average lower in the second half compared to the first half, though the volatility of volatility will remain elevated. Options supply, structured ETFs, and summer seasonality should help suppress the VIX, but investor crowding, policy risks, elevated interest rates, oil prices, and the US midterm elections prevent markets from re-entering a stable low-volatility regime. Consequently, the bank slightly raises its second-half VIX median forecast to 17.
Strategically, the firm recommends maintaining long positions in 2027 SPX, 2027 RTY, and 2026 NDX dividend futures, while rolling long SPX 2026 positions into 2028. On the funding side, strong leverage demand has pushed US equity index implied funding spreads to record non-year-end highs. Thematically, the report favors AI and tech relative outperformance, bullish financials, catch-ups in low-volatility and utilities, and selling puts on Alphabet and Microsoft pullbacks to establish target long positions at better prices.
Fundamentals for dividend futures appear robust. NVIDIA's 25-fold dividend increase adds approximately 2.7 points to SPX annualized dividends and 11.3 points to NDX. Additionally, the upcoming Russell rebalance should lift RTY annual dividends by roughly 16.5%. However, mega-cap tech IPOs pose a potential dilution risk to future NDX dividends. While tech leadership remains the primary trading focus, investors should actively diversify into financials, utilities, and low-volatility baskets.
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