Markets at Record Highs with Volatility Nadir - What Could Shake Things Up?

Markets at Record Highs with Volatility Nadir - What Could Shake Things Up?

With President Trump delaying tariffs once again, the market’s confidence is only further engrained. Already at record highs and seasonal expectations prominent, what – if anything – can upend optimism?

Talking Points:

• Another tariff deferment has reinforced capital market bulls’ conviction with a spreading exposure beyond benchmarks like the S&P 500
• There is a full docket of macro economic event risk ahead, but the 29th week of the year carries significant expectations for low volatility
• Top event risk this week includes top ticket items like China’s 2Q GDP release, US bank earnings, US CPI and consumer confidence

Another Record High for the S&P 500 and Increased Exposure

While the S&P 500 may have eased off its absolute record high close to close this past week, the default enthusiasm is impossible to miss. The markets are tuned to ‘risk appetite’ and the reach is broadening across the asset spectrum as confidence in complacency is encouraging market participants to put money towards riskier assets with a deeper discount than the largest market cap benchmarks, encouraged by the belief that confidence can weather any reasonable ‘bad news’ that may come along.

There is a strong case for that risky perspective in the persistence of the climb. The expectations around seasonal norms no doubt further reinforces that confidence as the 26th week of the year has averaged out the trough for the so-called ‘fear index’, the VIX. This conviction is certainly open to criticism, but ‘fighting’ the market’s view is more an effort to be ‘right’ rather than aligning to ‘probabilities’. And, typically, the general point in market participation is to yield gains on our investment.

Investor Credit Versus S&P 500 (Monthly)

 

Source: John Kicklighter, Standard & Poor’s 

 

Week 29 Is Historically the Year’s Lull for the VIX

When it comes to fundamentals, the backdrop for market conditions doesn’t present a particularly sensitive ‘tender box’ of volatility – though there is always the possibility. There are a number of themes that could capture the headlines, but the market’s appetite for response has been seriously stunted. That could translate into a throttled ‘bullish’ reaction to favorable data as much as it insinuates a reticent retreat should the negative gain traction among the market participants.

As far as density of meaningful global macro event risk, we are looking at one of the longest lists of ‘high’ level listings that we’ve seen in some weeks. That said, the de-sensitized market will raise the required ‘shock value’ to engender the kind of sharp market movements that many news traders pine after for a successful period.

Chart of S&P 500 Average Weekly Performance and VIX Volatility (From 1925/1990-Present)

 

Source: John Kicklighter, Standard & Poor’s

 

A Dense Calendar but No Productive Thematic Focus

In terms of what scheduled event risk we should be monitoring for impact, there is a lot of data that could theoretically feed into broader localize or systemic themes, but too much event risk competing for the market’s attention could inadvertently suppress a market response owing to split attention or anticipation of another important event with an imminent release. If we were to look at it from a regional perspective, the run of Chinese event risk we have from Monday into Tuesday would be a stand out worth monitoring.

While we have lending and trade balance figures for June on Monday as well as a broader mix of economic performance figures (fixed investment, industrial production, consumer health) Tuesday, it is the first reading of 2Q GDP that I will be watching most closely. This data point will be weighed by its lagging nature and the West’s skepticism around its veracity, but it sets the official baseline for health for the world’s second largest economy. An upside surprise will lean against a lot of the skepticism, but a significant miss may stir a more serious response given the assumptions.

Calendar of Top Global Macro Event Risk

 

Source: John Kicklighter

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It’s Earnings Season Once Again, But What Are the Expectations?

Where growth forecasts, trade wars and rate expectations all carry caveats among market participants as to why ‘unfavorable data deserves a qualifier’ and the positive just adds modest fuel to an already burned down fundamental fire, US earnings still holds a finely balanced picture with the capacity to directly hit investor pocket books. The second quarter corporate reporting run will begin in earnest Tuesday morning with the typical opening run of major US financial institutions. JPMorgan’s earnings in particularly will carry the most weight given its role as the largest bank (and 10th largest market cap) as well as a reflection of market activity.

That said, also due that morning are Citigroup’s figures for a consumer finance view, Wells Fargo to reflect on housing and BlackRock as an investment house view. That isn’t the only earnings data worth our clocking however. Among other top company reports I will be watching, the Goldman Sachs, Johnson & Johnson, Taiwan Semiconductor Manufacturing (Taiwan earnings) are worth evaluation. Yet, the only ticker worthy of equal attention to JPM is NFLX. The tech player and entertainment giant – not to mention 15th largest market cap – will report after the close on Thursday.

Implied Market Reaction to Scheduled Earnings Releases

   

Source: SpotGamma

 

US Focus on Fed Pressure (Rates) or Consumer Confidence (Growth)?

Finally, among the top event risk to monitor, we have something of a competition from the United States’ docket. Earlier in the week we have the June consumer price index update, which will be fodder for either Fed Chairman Powell or President Trump in the standoff around the rise monetary policy approach for the United States…not to mention the question of FOMC independence. I do not dispute that this is not an important event risk, but it’s impact will compete with the earnings focus also pre-New York open. A stronger reading will justify the Fed’s wait-and-see, but it is unlikely to seriously change moderated rate expectations.

Alternatively, a drop could feed into a slow shift in Fed member attitudes and recognition that the US sports the highest benchmark among its major counterparts. At the other end of the week, we have the first (‘preliminary’) reading of the University of Michigan’s consumer confidence survey for July. This is an important look into the volatile and often conflicting perspective to a dominant engine of growth – relative to the market’s enthusiasm. This print matters, but its late-in-the-week release will certainly work against an immediate reaction attempting any systemic movement.

Chart of DXY Dollar Index and Implied Fed Cuts in 2H 2025, 1H 2026 and Next 12 Months

 

Source: TradingView.com, ICE, CME

 

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--- Written by John Kicklighter, Global Head of Content