When the US stock market is at its "extremely fragile" state, the earnings season begins.

The volatility on the US stock index appears calm on the surface, but internal pressures are building up. Under the triple pressure of geopolitical tensions, monetary policy expectations, and credit market signals, market vulnerability has risen to near record highs in recent years - just as a high-expectation, high-risk earnings season is beginning. The "Turbu-lens" market fragility index from the UBS derivatives strategy team currently reads 0.9 (range -1 to 1), the highest level since mid-September 2025, with such readings historically indicating a sudden surge in the VIX. The UBS derivatives strategy team led by Maxwell Grinacoff warns that this index points to "extreme market fragility" just as the earnings season kicks off. At the same time, the team also points out that if systematic strategies are leveraged across the board, the index reading "could truly touch +1." The high expectations in the current market further amplify risks. Analysts expect a 24% increase in earnings for S&P 500 index components in the second quarter, and a 12% increase for the Euro Stoxx 600 index. Unlike in previous earnings seasons, analysts have continued to raise forecasts on the eve of the reporting period, suggesting that if the results disappoint the market, there will be greater room for adjustment. Beneath the calm VIX, single-stock volatility has more than tripled The VIX is currently at a low level, but this calmness is misleading. The Barclays strategy team led by Anshul Gupta points out that the recent decline in the VIX coincides with a calendar window where seasonal price fluctuations typically narrow, representing a "brief sweet spot" with limited sustainability, as the earnings season opening could re-boost the VIX. Of greater concern is that the low index volatility masks extreme differentiation within the market - single-stock volatility has exceeded index volatility by over three times. Grinacoff states that the probability of this gap narrowing in the summer is high, and in such a scenario, whether it is a repricing of monetary policy or geopolitical disruptions, it could trigger a sudden increase in index volatility. In terms of hedging strategies, as dispersion trading and sector rotation are likely to continue during the earnings season in the coming weeks, the effectiveness of hedging at the index level may be limited. Grinacoff suggests that "single-stock options may offer better opportunities tactically." Oil prices and the bond market send dual warnings The volatility in oil prices due to geopolitical tensions is exerting sustained pressure on global stock markets. Brent crude oil prices have risen to below $80 per barrel, a trend that may keep inflation expectations high and pressure the Federal Reserve to maintain a wait-and-see stance. Although there was limited changes in rate hike expectations after the release of the minutes from the Fed meeting, the yield on the 10-year U.S. Treasury bond has quietly risen to close to 4.6%, signaling heightened volatility in the bond market, which is negative for global stock markets or at least could suppress further gains. The Citi strategy team (including Alice Zheng) points out that the market's positioning for higher oil prices is imbalanced, with Europe particularly vulnerable - due to its high dependence on imported energy and lower exposure in AI beneficiary assets. "If the rise in oil prices continues, the pullback in European stock markets could be quite significant, especially since the market has already absorbed expectations of the conflict ending to a large extent," the strategists wrote. The credit market has not endorsed the stock market rally The performance of the credit market has raised a warning flag for the current stock market momentum. While stock indexes reached record highs earlier, the narrowing of credit default swap (CDS) spreads has been limited, with the credit market not fully endorsing the stock market rally. With recent pullbacks in the stock market, the two have realigned, but analysts believe that for the stock market to achieve stronger upward momentum, more definite tightening signals from the credit market are needed. Faced with these risks, UBS recommends that investors capture opportunities for volatility at the individual stock level through pair-wise correlations trades. In terms of sectors, UBS believes that the technology, energy, and financial sectors in the US market are most suitable for pair-wise volatility trading, while in the European market, the energy, technology, and consumer discretionary sectors are recommended. This article is adapted from "Wall Street News" by Zhang Yaqi, GMTEight edited by Li Cheng.