Is it time to fade the fear rally? The Equity Vol view

The S&P 500 finished Friday lower by more than 5%, completing a weekly decline of almost 10% — a steep response to the latest increase in trade tensions and growing economic uncertainty.

Markets were shaken by Liberation Day pronouncements, which represented a dramatic change in U.S. trade policy, increasing the effective U.S. tariff rate. The ross-industry volatility exploded, with numerous sectors seeing 4-5 standard deviation movements, pointing towards widespread weakness on the back of concerns about consumer spending, inflation, and even recession risks.

Adding fuel to the fire, Fed Chair Powell also stated on Friday that tariffs could have a long-term inflationary impact, rendering the situation for rate cuts more challenging. This has led to markets reassessing the prospects of near-term monetary easing — one of the key support columns that had been supporting risk appetite in recent months.

Although the headline tariff rate hikes are staggering, the likelihood that they will be sustained at those levels is suspect. Historically, such aggressive trade measures are more of a negotiating ploy than a durable policy stance. The cited explanation is in regard to trade imbalances, but potential off-ramps could be supply chain commitments, labor agreements, or bigger geopolitical concessions.

With this in mind, we might now be at or near a peak of tariff jitters, leaving the potential for incremental de-escalation or selective rollbacks that can allay investor worries over the next few weeks.

The U.S. Indices demonstrated weakness not seen for a long time: