Volatility & Complexity Increase for Stocks

Equity markets face further volatility as political uncertainty, slower expected growth and complexity around AI weigh on sentiment despite strong earnings.

• The S&P 500 has fallen by 4.0% or more on 15 days over the past 10 years, with only six preceded by a gain of at least 1%; outside the COVID period, this pattern occurred three times, including twice in 2022 and again this week.
• The index is about 6% below its all-time high after churning since early June, while the technology sector has struggled despite strong earnings growth and a stable economy.
• The author attributes the adjustment to prediction markets anticipating political change, slower data-center construction and political disputes that could disrupt commerce.
• Volatility and positioning measures for hedge funds and quantitative firms indicate a significant portfolio shift that has probably already occurred.
• Equity prices have generally followed earnings, and price appreciation has lagged earnings growth, allowing price-to-earnings valuations to improve; the next earnings cycle in early 2027 may provide stronger fundamental support.

Takeaway: Silvercrest sees a balanced equity risk outlook, with geopolitical risk around the Strait of Hormuz and slower growth weighing on sentiment before the next earnings cycle, supporting long-term risk targets and broad diversification.