Nomura Cross-Asset — “And We’re Back”: ATHs, Netting-Up, Spot-Up/Vol-Up, and the Return of the Right Tail

Nomura’s read is that US equities have returned to all-time highs not despite the pain of the last 4–6 weeks, but because of it. The violent momentum unwind, AI thematic reversal, and hedge-fund de-grossing cleared the positioning overhang that had been capping the index. Now that prior “funding shorts” — especially hyperscalers / mega-cap Tech — are leading again, the index can finally break out.

The key message:

The market has flipped from forced de-grossing to forced re-grossing. Investors are chasing back into upside, netting-up books, and buying calls as the right tail comes back to life.

This is why yesterday’s session saw the defining move: spot up, vol up, with S&P call skew extremely rich, index skew crushed, and dealers potentially forced to chase delta higher as long-forgotten upside calls came back into play.

1. How We Got Back to ATHs: The Pain Was the Setup

Nomura’s framework starts with the June warning around the consensus AI market-neutral trade:

• Long AI Enablers / Bottlenecks

• Short Hyperscalers / Mega-cap Tech

By late June, this had become a highly crowded expression of the AI theme. The logic had been that AI infrastructure / bottlenecks had the scarce revenue leverage, while hyperscalers were viewed as capex funders with uncertain ROI.

But that positioning created a major asymmetry.

Nomura had warned that the overshoot in Enablers vs Hyperscalers was increasing reversal risk in heavily grossed-up market themes. The phrase was:

“Stability breeding instability.”

That is exactly what happened. The market-neutral AI trade was rinsed in a biblical momentum unwind.

Since the June 26 note:

That reversal was painful for hedge funds, but constructive for the index because hyperscalers and mega-cap Tech matter far more for index direction.

2. Why the Index Could Not Break Out Before

Nomura’s earlier point was that the broad equity market could not make fresh highs without hyperscalers leading from the front.

For much of the past three months, hyperscalers / mega-cap Tech / Mag8+ had been relegated to “funders” status. In long/short books, they were used as shorts or underweights to finance crowded AI enabler longs.

That produced index-level chop:

• Enablers were crowded and extended.

• Hyperscalers were under-owned / shorted.

• Index heavyweights were not leading.

• Broad equity beta lacked leadership from its largest weights.

Once that trade reversed, the index recovered.

The mechanical relationship:

Short Hyperscalers Cover+Long Enablers De-Gross→Megacap Leadership Returns→Index BreakoutShort Hyperscalers Cover+Long Enablers De-Gross→Megacap Leadership Returns→Index Breakout

This is why a painful long/short unwind can be bullish for the S&P and Nasdaq.

3. Momentum Unwind Became the Catalyst for a Healthier Index Rally

The past few weeks included:

• Several days of Corr1-style de-risking

• Roughly 5% high-low range in S&P futures

• Roughly 11% high-low range in Nasdaq futures

• Historic hedge-fund de-grossing

• High-beta momentum’s worst one-month performance since the GFC

• AI thematic volatility at post-COVID highs

But broad index vol held together. That is crucial.

The reason was extreme thematic dispersion. The market was violently rotating under the surface, but the index was cushioned by the role reversal between leaders and laggards.

In plain English:

• Crowded AI enablers fell.

• Hyperscalers rallied.

• Shorts were covered.

• Longs were sold.

• Index-level correlation stayed crushed.

• Index vol did not explode.

That is why S&P 500 correlation remained very low.

4. Dispersion Keeps Printing

Nomura emphasizes that this has been an extraordinary environment for Top 50 Vol Dispersion.

The setup:

• Single-name realized and implied vol are extremely high.

• Index vol remains low.

• Index implied correlation remains crushed.

• Leader / laggard bifurcation is extreme.

• The market is moving violently beneath the index.

This keeps dispersion trades profitable.

The key structure:

High Single-Name Vol−Low Index Vol=Dispersion PnL OpportunityHigh Single-Name Vol−Low Index Vol=Dispersion PnL Opportunity

But the irony is that the latest move looks like a kind of reverse dispersion in factor terms: the prior laggards / funding shorts became the leaders, and the prior leaders became laggards.

5. Yesterday: “Correlation 1” Rally and Spot-Up/Vol-Up

Yesterday’s rally had a different character. It was less about offsetting rotations and more about a broad everything rally.

Nomura describes it as a Correlation 1-type rally, where equities rallied broadly and investors chased upside convexity.

Key features:

• S&P rallied strongly to all-time highs.

• Index skew was “nuked out.”

• Spot went up.

• Vol went up.

• Investors chased back into upside.

• Long-forgotten calls came back into play.

• Dealers picked up large amounts of delta.

• Books were netted-up through adding longs and covering shorts.

This resembles April / May’s spot-up / vol-up regime, when upside demand overwhelmed normal volatility decay.

6. The Right Tail Is Back

The defining phrase is that the right tail has come back to life.

Investors are no longer focused only on downside protection. They are now trying to avoid missing a melt-up.

That is showing up in options flow. Nomura cites live paper in:

• SPX SepQ 8500 / 8900 call spread

• Paid 2.4

• Size: 12k

• Taking advantage of 98th percentile SPX call skew

This is a classic expression of upside chase: defined-risk, high-strike call spread buying into a rally.

The mechanics are powerful. As spot rallies back toward strikes that seemed unreachable during the selloff, dealers who are short those calls need to buy more delta.

That can create a feedback loop:

Spot Rises→OTM Calls Gain Delta→Dealers Buy Futures→Spot Rises FurtherSpot Rises→OTM Calls Gain Delta→Dealers Buy Futures→Spot Rises Further

That is the right-tail reactivation.

7. Netting-Up: Adding Longs and Covering Shorts

Nomura describes the current behavior as netting-up.

That means investors are increasing net exposure through both sides of the book:

1. Adding longs

2. Covering shorts

This is important because a rally driven by both new buying and short covering can move fast. It can also feel under-owned even as the market hits highs, because many managers are still recovering from de-grossing and are forced to re-enter.

The market hit “escape velocity” and blew through the daily straddle, forcing further chase.

This aligns with the derivatives desk comment that investors were aggressively buying short-dated S&P and Nasdaq upside.

8. Earnings Are Providing the Fundamental Fuel

This is not just technical. Corporate earnings remain strong.

Nomura notes:

• 85% of S&P 500 companies reporting so far have beaten EPS consensus.

• The average over the past four quarters was 83%.

• 74% have beaten revenue estimates.

So the rally has a fundamental justification:

• Earnings are beating.

• Revenues are beating.

• AI capex is feeding into broader manufacturing strength.

• Hyperscalers are recovering leadership.

• Macro growth data are firm.

This is why the rally is not easily dismissed as purely mechanical.

9. Manufacturing and AI Capex Trickle-Down

Nomura highlights that US manufacturing is “raging”:

The argument is that AI capex spending is now creating broader economic spillovers. That makes higher rates less toxic for equities if the reason for higher rates is stronger nominal growth and better earnings.

In other words, the market can tolerate higher yields if those yields reflect growth rather than pure inflation stress.

The equity-friendly interpretation:

AI Capex→Manufacturing Strength→EPS Upside→Equity RallyAI Capex→Manufacturing Strength→EPS Upside→Equity Rally

10. Why Higher Rates Have Not Killed Equities

Nomura’s big macro point is that higher rates have not been a headwind for equities because rates are rising for the “right” reasons.

The drivers include:

• Growth up

• AI capex trickle-down

• Strong earnings

• Higher real rates associated with stronger activity

• Continued fiscal impulse

• Asset allocators lacking better alternatives

That said, Nomura also notes that the tilt remains toward paying rates, because investors require more risk premium to hold Treasuries.

The reasons:

• Warsh Fed quasi-endorsing higher reals / higher policy-rate expectations

• Lack of forward guidance

• Market pricing being embraced

• Iran / crude inflation tail risk

• Record fiscal deficit spending

• Term-premium concerns

So rates may occasionally squeeze lower on good headlines, but the bigger structural pressure is still toward higher term premium.

11. Crude / Strait Headlines Created a Bond Squeeze

Nomura points to the morning rally in Treasuries and crude selloff as driven by headlines around the Strait:

• Treasury Secretary Bessent said there may be a deal as early as tomorrow to open the Strait.

• Al Arabiya sources suggested an anticipated announcement on reopening the Strait of Hormuz.

• Crude fell roughly 5%.

• Treasury futures rallied modestly.

That type of headline can create short-covering in bonds and support equities by reducing inflation / geopolitical tail risk.

But Nomura frames these as occasional short-squeeze / cover episodes, not necessarily a durable reversal in the higher-rates regime.

12. Tactical Market Takeaways

Bullish

• S&P back at all-time highs.

• Hyperscalers have resumed leadership.

• Momentum unwind cleaned up positioning.

• Earnings beats are strong.

• Revenue beats are strong.

• AI capex is feeding through to manufacturing.

• Investors are netting-up.

• Dealers may need to chase upside delta.

• Spot-up / vol-up confirms demand for upside convexity.

• Lower crude provides near-term macro relief.

Fragile / Risky

• Upside FOMO is now visible.

• Call skew is extremely rich.

• Spot-up / vol-up can be unstable.

• A lot of the move is mechanical re-risking after de-grossing.

• Term premium / higher-rate risk remains.

• Fed credibility concerns are unresolved.

• Fiscal deficit pressure remains.

• Crude / Iran tail risk can return.

• Crowded upside calls can create air pockets if spot stalls.

13. Trade / Positioning Implications