Derivatives strategists across Wall Street are framing the current equity backdrop as one where upside momentum and volatility could coexist, shaped by artificial intelligence adoption and an unusually noisy policy environment. As investors balance participation in a potential rally against mounting geopolitical and policy risks, banks point to President Donald Trump’s unpredictable shifts from comments on the Federal Reserve’s independence to rhetoric around Iran, Greenland and electricity markets as an ongoing source of uncertainty. Bloomberg Intelligence’s Tanvir Sandhu has described this mix of earnings growth, cyclical recovery and AI-driven upside alongside fragile sentiment as a setting where both equity prices and volatility may find support into 2026.

Within that framework, strategists are steering investors away from simple directional bets and toward structures that could benefit from dispersion and spot-up/vol-up dynamics. Barclays has argued that outright calls on the Magnificent Seven look expensive, instead favoring a Palladium dispersion trade tied to the top 10 S&P 500 names, including Tesla TSLA, with a December expiry, a 21% strike and a 4% premium. Bank of America BAC, JPMorgan JPM and Barclays have also promoted upside variance, or UpVar, swaps on the S&P 500 or Nasdaq 100 over one- to two-year horizons, highlighting their discounted pricing versus vanilla variance swaps and their potential payoff if a rally is followed by a sharp reversal.

Outside U.S. megacaps, strategists continue to see selective opportunities and targeted hedges. European banks remain a favored theme after a strong recovery in 2025, with some trades focused on cheaper upside exposure through knock-out calls on the Euro Stoxx Banks Index, while European miners have drawn attention via call spreads on the Stoxx 600 Basic Resources Index amid expectations that fundamentals could improve with possible Chinese support and AI-linked infrastructure demand. At the same time, investors have been buying volatility protection on large technology names, including out-of-the-money puts on Apple and Nvidia, and using VIX call spreads to hedge headline risk, reflecting a view that volatility could rise quickly if policy or geopolitical tensions intensify.