The Stock Market Is Hitting New Highs. Things Aren’t as Calm as They Seem.

Stock market volatility has been higher in the first half of 2025, compared with the year-ago period. (TIMOTHY A. CLARY / AFP / Getty Images)

The S&P 500’s race to the top has been nothing but a series of bumps along the way.

The index closed at two new highs in June, including Monday, gaining roughly 5% this year. But the market rally has been a volatile ride upward.

Monday was a perfect example. While all three major U.S. indexes were in the green, the main gauge of market volatility—the Cboe Volatility index, or VIX—rose almost 3% during the session. The index, also known as Wall Street’s “fear gauge,” uses the options market to measure expected swings in stock prices. While stock prices are high today, the Vix’s recent rise indicates that traders see a range of possible stock market prices in the next few months, including the possibility of steeper falls.

The VIX rose again Tuesday, to a level of just over 17, before moving back down a touch below, to close at 16.72. Historically, this is still relatively low, considering the index has spiked to around 80 during major market scares, such as the 2008 financial crisis.

The concern now is that even though equity markets have rallied, underlying volatility has risen compared with last year. The Vix’s lowest close so far this year was just over 14, versus around 11 in the first half of 2024. And its high this year, 52 in early April, is above a peak of 18 in last year’s first half. Relatedly, the Vix’s 50-day moving average has risen to 20, versus 13 this time last year Essentially, uncertainty and risk for the S&P 500 have edged up, despite market optimism.

This spring, “while the VIX has concurrently retreated from [intraday levels around] 20, it has remained more supported than many may expect given the equity rally,” write Bank of America derivatives analysts.

Driving stock market uncertainty has largely been policy. Yes, the White House has rolled back some tariffs, but some remain in place and others are in flux as they remain on hold for negotiations. Some companies have signaled they want to raise prices later this year to fully offset higher costs from tariffs. That means inflation could come in higher-than-expected in the third quarter, and in turn could delay Federal Reserve interest-rate cuts and lead to slowing economic growth.

Secondly, President Donald Trump’s mega tax and spending bill, which just passed a key hurdle in the Senate, could increase the federal deficit by $3.3 trillion through 2034, according to projections. That would increase the government’s borrowing needs, likely lifting Treasury bond yields—yet another factor that could curb economic growth.

These policy-related concerns are major reasons that BofA is sticking by its view that the Vix’s bottom this year will be more elevated, at around 16 or 17.

This somewhat heightened volatility signals that anyone who wants to buy the S&P 500 first needs to address the growing risks that could materialize later this year—and drag down stocks. Second-quarter earnings calls, when companies issue guidance for the third quarter, are one area to watch, because executives could share plans to increase prices.

The next question is what inflation will look like for July—the start of the third quarter—and August, when inflation data would begin to reflect any further price increases in the third quarter. Then, the spotlight would shine brightly on the Fed, which likely will only lower rates when it meets this summer if inflation is close enough to its 2% target. All inflation metrics have been above the Fed‘s 2% goal recently. Any of these developments could bring stocks down soon.

All of these factors suggest that investors buying the market today should thoroughly acquaint themselves with such risks—and have strong stomachs.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com