The U.S. stock market took a sharp downturn last Friday, marking its most significant sell-off in two months. This sharp drop disrupted the tranquility that had prevailed in recent weeks, as the S&P 500 hovered near its all-time highs, and the VIX volatility index remained well below its five-year average. Although the market had seemed relatively stable, there were subtle signs indicating that turbulence could be on the horizon, with some investors already preparing for such a shift long before it materialized.

One of the key indicators of potential market unrest was the surge in demand for protective options. A particularly notable metric was the ratio of open-call options to put options on the VIX, which neared levels unseen since September 2023. On Tuesday of the preceding week, over a million call options had been traded, a clear indication that traders were positioning themselves for an uptick in volatility. This surge in activity came at a time when market sentiment was shifting, with many investors making larger bets that volatility would return to the market soon.

The upcoming earnings report from NVIDIA, set to be released after the U.S. markets closed on Wednesday, was seen as one potential catalyst for this change in sentiment. Despite President Biden’s recent remarks about tariffs and his return to office failing to incite immediate panic among traders, analysts’ warnings about economic uncertainties were becoming louder. Industry experts, including Charlie McElligott from Nomura and Scott Rubner from Goldman Sachs, have increasingly voiced concerns about the potential risks facing the global economy, adding to the unease surrounding the market.

Brent Kochuba, the founder of the options platform SpotGamma, commented on the gravity of the situation, explaining that NVIDIA, with its dominant position in the market, had the potential to influence not just its own stock but the broader market as well. He pointed out that in the coming weeks, various factors could stir volatility, including the uncertain implications surrounding tariffs and the looming deadline for a potential U.S. government shutdown.

NVIDIA’s stock, having soared more than twice its value since its lows in October 2023, has become a central figure in the market, with its market capitalization reaching a colossal $3.3 trillion. As the second-largest component of the S&P 500, NVIDIA’s stock fluctuations have an outsized impact on the index’s performance. This meteoric rise has been largely driven by the AI boom, with the company positioning itself at the forefront of the sector. However, its journey has not been without setbacks. Since releasing its previous earnings report in November, NVIDIA’s stock has experienced considerable volatility, and recent concerns over Chinese AI startup DeepSeek have only added to the uncertainty. DeepSeek’s technological advances and market performance have raised alarms that NVIDIA’s dominant position in AI could be challenged in the future, leading to increased competition in the space.

This volatility is reflected in the behavior of options traders, who were forecasting a significant swing in NVIDIA’s stock price following its earnings release. As of last Friday, these traders anticipated a 7.7% movement in either direction after the earnings report, a figure slightly lower than the 9.2% average swing observed in the stock’s post-earnings movement over the previous eight quarters. In the broader market, the S&P 500 also saw signs of increasing volatility, with its weekly volatility edging up to 0.8%, slightly above its two-year daily average of 0.6%. These increases in volatility reflect a growing sense of unease as the market braces for potential shocks, particularly from NVIDIA’s earnings and any subsequent market reactions.

Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, highlighted the potential market-wide impact of NVIDIA’s earnings report, stating that the outcome could send ripples through the broader AI sector. If NVIDIA exceeds expectations, it could reignite bullish sentiment, driving up prices across AI-related stocks and boosting investor confidence. On the other hand, a disappointing report could have the opposite effect, raising questions about the health of the AI industry and potentially leading to declines across the sector. In either case, the volatility surrounding NVIDIA’s performance is expected to have broader implications for the market, potentially triggering a correction.

But NVIDIA’s earnings aren’t the only factor that could influence market dynamics in the coming weeks. Several other events are on the horizon that could exacerbate market volatility. The U.S. government’s suspension of new tariffs on imports from Canada and Mexico is set to expire on March 4, and any changes in this policy could have significant repercussions for companies dependent on North American trade. Tariff adjustments have the potential to affect corporate costs, especially for those in industries reliant on cross-border trade. The expiration of the tariff suspension could lead to increased costs for businesses, which would likely weigh on the broader economy.

In addition, investors are eagerly awaiting the release of U.S. employment data, a critical economic indicator that provides insight into the strength of the labor market and the broader economy. Weak employment figures could spark fears of a recession, sending shockwaves through the stock market and potentially triggering a downturn. The March 14 deadline for a potential U.S. government shutdown also looms large, with the risk of a shutdown adding another layer of uncertainty to the already volatile market landscape. A government shutdown would halt certain federal services, delay economic data reporting, and generally introduce a high level of unpredictability into the market’s future trajectory.

Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, further emphasized the potential for volatility, stating that any significant tariff-related news, especially if negative, could lead to synchronized market fluctuations, amplifying volatility across the stock market. The combination of factors at play—NVIDIA’s earnings, potential tariff changes, and upcoming employment data—has created a complex environment for investors, and it remains to be seen how these catalysts will interact in the weeks ahead.

As the market navigates these turbulent waters, investors must remain vigilant, keeping a close eye on the unfolding events that could shape the direction of the economy. The past week’s sell-off serves as a stark reminder of how quickly market sentiment can shift, and the coming weeks are likely to present more opportunities for volatility. Investors will need to stay nimble, adjusting their portfolios as new developments arise and keeping a watchful eye on the broader economic signals that will dictate the market’s next moves.