The S&P 500 closed at a fresh record Thursday while Wall Street's fear gauge, the VIX, sank to its lowest level since early January before ticking back up. Demand for crash protection has also eased, but some strategists warn the calm could mask building risk heading into September, historically the index's weakest month.
S&P 500 sets a record as the VIX slips
The S&P 500 tallied a fresh record finish on Thursday. Yet the Cboe Volatility Index rose that same day. Before that uptick, the VIX had been trading at its lowest level since early January, falling as low as 14.39 on Wednesday, according to FactSet data. The unusual pairing of a record stock close with a rising VIX suggests the latest sprint higher for stocks might be overdone.
Calm has spread beyond Wall Street. South Korea's Kospi 200 Volatility Index has fallen more than 34% this month to its lowest level since April 30, FactSet data showed, even after the country's stock market endured its most volatile episode in history as local investors piled into leveraged bets on memory-chip stocks. Demand for crash protection has thinned too: the Cboe Skew Index touched its lowest level of 2026 on Aug. 4, Bloomberg data showed, a reading that suggests the cost of hedging against a drawdown over the next 30 days has become relatively cheap amid light demand.
A word of caution
Wall Street is coming off another blockbuster earnings season, and analysts' expectations for the rest of 2026 and beyond have kept improving, with earnings forecasts even outpacing gains for stocks at the index level, FactSet data showed. But some on Wall Street see reasons for caution: the conflict with Iran drags on, Federal Reserve independence remains a lingering concern, and rising global bond yields have raised the stakes for stocks, said Michael Kramer, portfolio manager at Mott Capital Management.
Technical indicators are flashing warnings too. The gap between realized and implied volatility has narrowed to the low end of its recent range as stocks climbed over the past two weeks. September is also historically the weakest month of the year for S&P 500 returns, an analysis from Dow Jones Market Data showed. A recent pickup in the Cboe Skew Index could suggest investors are already changing their tune, according to SentimenTrader, though the firm found past episodes with similarly low VIX readings alongside large skew changes saw relatively muted declines for stocks over the following month.
Stocks stage a sharp August rebound
All three major U.S. equity indexes have rebounded sharply in August from their steep selloff over the prior two months. The S&P 500 has risen 4.1% so far this month, the Dow Jones Industrial Average is up 2.6% and the Nasdaq Composite has popped 5.6%, FactSet data showed, following back-to-back monthly declines for the S&P 500.
Stephen Innes, managing partner at SPI Asset Management, said the market is rebuilding exposure after last month's selloff but not in a way that has removed the instability. Investors are still holding downside hedges while trying to repair underexposure to the rally, he said, leaving a market that may not own enough upside if the squeeze extends, or enough downside protection if the next catalyst breaks the other way.
Veteran technical analyst Walter Deemer put it more bluntly in a post described by MarketWatch: the market has "nothing to fear but the lack of fear itself."
Source: MarketWatch
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