The past week in the US equity markets was a rollercoaster ride that left traders on edge. The Cboe Volatility Index (VIX) spiked to an alarming 65.73 on Monday, sending shockwaves through the markets as the S&P 500 plummeted by over 4%.
The sudden surge in volatility triggered an almost immediate reaction from systematic funds, which are programmed to adjust their positions based on pre-defined rules.
These funds, which had increased their equity holdings to 110%, were forced to slash them to around 50%, a move reminiscent of the drastic actions taken at the height of the pandemic.
By mid-week, however, the narrative began to shift. The S&P 500 staged a dramatic comeback, posting its largest gain since 2022 with a 2.3% rise on Thursday. By the end of the week, the index had recovered over 4% from its Monday lows, and the VIX had settled back towards the 20 level, suggesting a return to relative stability.
Despite this recovery, the market remains on uncertain footing. The sharp decline in tech stocks, particularly heavyweights like Amazon, Apple, and Nvidia, is a clear indication of the challenges facing the sector.
For one, expectations have been sky-high, and even solid earnings reports have not been enough to sustain momentum.
Nevertheless, with 91% of S&P 500 companies having reported their Q2 2024 earnings, 78% have surpassed earnings per share (EPS) expectations, and 59% have exceeded revenue forecasts, indicating that the underlying fundamentals remain strong.
Looking ahead, the outlook for the third quarter is mixed. With 47 companies issuing negative EPS guidance against 39 positive, the cautious approach of corporate America is clear. However, this conservative stance is not uncommon, and it is often a strategy to manage expectations. The true test will come in Q4 when the accuracy of this guidance can be fully assessed.
The broader economic picture also offers some reassurance. Although some recession indicators have been triggered, other key metrics like household income growth, consumer spending, and business investments remain robust. GDP growth has exceeded expectations, providing a counterbalance to the market’s recent volatility.
As we move forward, traders and investors should remain cautious. The recovery seen at the end of the week is encouraging, but it does not guarantee a smooth ride ahead. The market’s reaction to the latest developments has been swift and severe, reflecting the fragile nature of investor sentiment in the current environment.
The VIX is likely to remain elevated in the short term as traders digest recent market movements. While it has settled back towards 20, any negative news or economic data could trigger another spike.
The S&P 500’s recovery suggests resilience, but further volatility is expected, especially as we approach the next earnings season.
Tech stocks may continue to face pressure due to high investor expectations, but strong fundamentals should provide some support.
Traders would do well to keep a close eye on upcoming economic data releases and corporate earnings reports. In this environment, flexibility and caution are essential.
