IG's teams fear that the combination of a low VIX index and a high valuation multiple for the S&P 500 could create a "dangerous cocktail" for US equity markets.

In a strategy note, Alexandre Baradez, head of market analysis at IG France, points out that the volatility index, the VIX, fell back yesterday to around 11.5 points, its lowest level since 2019.

While he points out that such a lack of volatility is not necessarily synonymous with a rapid rebound in stress or a relapse in equity markets, the professional believes that the risk today seems to lie rather with the stretched valuation levels of the S&P 500.

According to him, the benchmark index for American fund managers is currently trading at around 21 times forward earnings.

By way of comparison, the S&P was paying around 23 times forward earnings in 2021, at the peak of the post-Covid bubble, when interest rates were at 0% and central bank liquidity was flooding the markets, he recalls.

If the US economy does indeed begin to slow... while the Fed continues to postpone rate cuts in the face of resilient inflation, then the current weakness of the VIX reflects a lack of anticipation on the part of investors... and a rebound in the VIX is to be expected before long", predicts Alexandre Baradez.

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