Turbulence beneath a calm surface

Stable index volatility is concealing unusually high stock-level turbulence that could become a broader market warning.

• Over the three months to the latest observation, S&P 500 and MSCI World index volatility was below historical averages of 1.04% and 0.85%, respectively, while the average S&P 500 constituent was unusually volatile.
• Historically, the average S&P 500 stock has been about twice as volatile as the index; it is now 2.9 times as volatile, meaning market-wide effects explain only about 12% of individual-stock variation versus roughly 25% normally.
• Measures from S&P Global and CBOE show stock-return dispersion at its highest published level apart from the brief COVID spike, while Verizon has typically moved 50% in the opposite direction to the S&P 500 this year.
• Average S&P 500 stock volatility is 37.9%, 25% of stocks exceed 44.5%, and the median volatility of the next tier of technology stocks is above 50%, implying daily moves of about +/-3.1% and either extreme upside or a substantial risk of permanent loss.
• The author argues that diversification is unusually valuable, while concentrated portfolios face more extreme outcomes; he also finds a potential warning in the parallel with 2000, when high valuations and technology capex preceded a major reversal.

Takeaway: Investors should trade patiently, remain price-sensitive and avoid panic, while treating AI data-centre and GPU spending with caution because the favourable economics driving current investment may disappear once that investment expands supply.