By Martin Baccardax
A sideways stock market with muted volatility suggests investors are either content with the status quo in the broader economy or unconcerned with lingering risks.
But digging deeper into the various ways in which Wall Street measures stock and index moves points to a very different conclusion. And it's worthy of attention.
The Cboe Group's VIX volatility index, often referred to as Wall Street's "fear gauge," tracks options pricing in a way that provides a look into how investors see the S&P 500 performing over the coming months. A higher reading suggests big daily swings, a lower one indicates broader calm.
Outside of spikes tied to big headline events, such as last April's tariff turmoil and the November market slump, the VIX has been largely range-bound for much of the past three years.
What's happening in individual stocks, especially over the past two months, is quite different.
The Cboe's VIXEQ index, which tracks volatility at the single-stock level, is up nearly 40% since the start of the year. A measure of the difference in how stocks perform relative to each other, the Cboe's DSPX, has risen more than 25%.
That means that, in some respects, investors are seeing more potential in selecting individual stocks than they are in being invested in the broader market, but they're also taking on far more risk to do so.
It further dovetails with the rotation we're seeing from megacap tech and other sectors tied to the artificial intelligence trade, which are heavily weighted in the S&P 500, into so-called real economy stocks in the energy, materials and consumer staples, which have less of a day-to-day influence.
The big moves in individual stocks, meanwhile, are in some ways canceling each other out, keeping the index-based VIX muted while the DSXP and the VIXEQ trade closer to historic highs.
"Passive index investors may barely notice Wall Street's dispersion trade, or the growing hand-wringing over AI," said Bret Kenwell, U.S. investment analyst at eToro. "But as money rotates into more insulated sectors, anything with even a whiff of disruption risk is getting hit. That creates potential opportunity for some investors, while others will stick with slow-and-steady indexing."
"Both approaches have tradeoffs: index investors have avoided some of the year's biggest volatility pockets, while long-term buyers may be able to pick up high-quality businesses at reasonable prices -- assuming the disruption narrative doesn't ultimately become reality," he added.
Another risk factor that has gone largely unnoticed is the continuing rally seen in U.S. Treasury bonds. Benchmark 10-year note yields, which move in the opposite direction of prices, have fallen 26 basis points over the past month, and tested the 4% level last week for the first time since November.
The move, however, coincides with data showing a surprisingly resilient job market, stubborn inflation pressures, tariff uncertainty, and hawkish messaging on interest rates from the Federal Reserve.
Bonds shouldn't rally in the face of those dynamics, and the move suggests fixed income traders are seeing risks to the broader economy that aren't being reflected in a complicated stock market.
Michiel Tukker, a rates strategist an ING, however, thinks the bond market is merely reflecting the levels of volatility we're seeing in stocks, and it's increasing the relative attraction of paper in both the U.S. and Europe.
"Equity volatility is on the rise whilst the outlook for bonds is still turning increasingly stable -- a rare mix by historical standards," he said. "The standard deviation of daily returns was three times higher for U.S. equities compared to [German government bonds] over the past year. Higher numbers were almost exclusively found around periods of major market stress, like the dot-com bubble, the global financial crisis and Covid."
Those are worrying comparisons, and markets are indicating notable stresses as a result.
Adam Turnquist, chief technical strategist at LPL Financial, notes that a ratio of consumer staples stocks, which are traditionally defensive, against consumer discretionary stocks, is trending at levels last seen at the start of the bull market in 2022.
"A decisive break below this trendline would not only point to continued staples leadership but may also signal a broader shift toward rising risk aversion among investors," he said.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
February 26, 2026 12:17 ET (17:17 GMT)
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