Skip links

Inside Markets — Realized Volatility

Realized Volatility

July 2, 2024

Equity market pullbacks amid subdued realized volatility (VIX<20) are normal, healthy and should be considered relatively harmless. These are pullbacks in the 3-5% range. Equity market pullbacks with a corresponding spike in realized volatility (VIX>20) often result in more meaningful corrections of 10-16% or bear markets of >20%. Over the last 40 years, most of those spikes in realized equity volatility have started with higher bond market volatility. The ~20bp backup in 10-year Treasury yields over the past two days is something to watch, but the backup only took the MOVE Index (bond market volatility) from 95.7 to 106.2, which is still relatively benign. A ~50-point spike in the MOVE Index over the course of 2-3 days is the kind of volatility that often spills into equity markets. The recent backup in yields occurred despite slightly cooler May core PCE inflation and more dovish June ISM manufacturing prints. The move started on Friday in what looks like a reaction/overhang from month-end pension fund rebalancing followed by higher European yields yesterday in response to weekend election results. Bond yields are more stable today with the certainty of higher US fiscal deficits (all else equal) at the start of the new fiscal year in October driving increased concerns for higher yields.

Bottoms-up consensus estimates are looking for Q2 revenue growth of +4.6% YoY with 8 of 11 sectors expected to have positive growth. The 4.6% revenue growth coupled with an average 12.0% profit margin takes YoY EPS growth to +8.8%, which would be the strongest period since Q1’22. The current bull market has been largely driven by Mag 7 companies with the S&P 493 still yet to emerge from the earnings recession that began in Q4’22. While it’s not our expectation, the broadening of depth in Q2 earnings season would give us confidence in the market’s ability to sustain and extend the rally into H2.

Read more