Oh, does this bring back a smile and a cringe. My daughter had an extremely shrill squeal that started around the age of 2, as I recall, and lasted for months before gradually fading out. It seemed she just liked to make that sound. I'm sensitive to noise, so I would stuff my ears with tissues.
There are soft foam earplugs available now – I strongly suggest you get a package or two. Maybe even cut one in half and see if your daughter will tolerate them. But she may simply get used to the noise and stop reacting. (Or, oh dread, start squealing herself.)
It seemed to me then that it was better to ignore it most of the time. If I gave no response at all, my daughter got bored with it after two or three shrieks. Occasionally, I would tell her gently that it was so loud it hurt mama's ears, and because she was a cheerful and tender soul, that would generally stop it, for awhile. If this has an effect on your son, you might gently remind him that he is scaring his little sister, which should be obvious if she cries. You have probably already pointed out that you protected him from things that scared him when he was that young, and so you'd like him to be careful for his sister.
But little ones forget, especially when they are excited about some new power or capability they have discovered. Testing limits is part of what they are doing, perhaps, but I think it's more the thrill of discovering cause and effect. And going for the biggest possible effects!
Distractions are good. And as you have noticed, they do have their limitations. There are just a lot of behaviors our children try and try again, and the attraction to the behavior is sometimes stronger than the consequences. For awhile, a month, a year. Then they are on to something else.
Good luck, Kim. It really sounds like you are doing all the right things. One last tip, I would keep my voice low when I talk to him after a squeal. Raising your voice might only reinforce the energy of "loud." You might come up with a list of "secrets" that would intrigue him, and tell him softly in his ear. If you can tell he's gearing up for a squeal, that would be a good time to divert him.