image2 image2 image2

Equities signal calm waters, or do they?

Peter Garnry

Head of Equity Strategy

Summary:  If equity market momentum and the VIX forward curve were the only two indicators worth looking at then one would be an optimist, but outside the spectacular momentum of mega caps, the equity market is signaling disruption. S&P 500 index concentration has risen to the highest levels on record and the mega caps outperformance is on par with previous major market turning points.

Key points in this equity note:

  • The VIX Index plunges to the lowest levels since March 2020 with the forward curve steepening suggesting the equity options market is betting on sustained momentum.

  • S&P 500 has never been more concentrated than today with the 10 largest stocks representing 30.4% of the index. This increases the risk and fragility in US equities.

  • Mega caps outperformance relative to the long tail of stocks in S&P 500 has reached levels seen during previous key turnings points in US equities.

VIX plunges to new lows

The VIX Index, measuring the 30-day expected annualized volatility in the S&P 500 Index, closed at 13.96 yesterday, a significant drop from 18 over just four trading sessions. This level was the lowest recorded in the VIX Index since the pandemic changed financial markets reflecting low levels of stress in US equities. There is a growing debate about the apparent calm equity market the past six months and the growing evidence of the economy slowing down and potentially headed into a recession. Many classical signals on the economy and especially those from the bond market are clear on the direction, but somehow the equity market is completely disagreeing.

The VIX Index itself has no predictability on future equity return, but the VIX futures forward curve has shown to improve return predictability. If we look at the spread between the 2nd nearest VIX futures contract and the VIX Index then the current spread is 3.4 points, which is right on the longer term average, the VIX forward curve is typically in contango (upward slopping). This level of contango is typically associated with positive equity returns so the equity options market is sending the signal that equities could extend their momentum. Earnings estimates are also reflecting the same optimism rising considerably throughout the Q1 earnings season as the outlook from companies has been much more optimistic than feared.

The US equity market has never been more concentrated

November 2021 marked a peak in US equity market concentration since 1991 although MSCI data suggests that the US equity market also experienced a dramatic peak in index concentration back in 1977. As the interest rate shock ran its course in 2022 pulling US technology stocks back to earth causing a significant reduction in the S&P 500 index concentration we were quite sure that the market had turned a corner in terms of index concentration. Never in our wildest imaginations would we have guessed that the index would roar back to new highs as of last Friday driven by an excessive AI-related rally in technology stocks. But the facts are what they are. The S&P 500 has never been more concentrated with the 10 largest stocks constituting a combined index weight of 30.4% as of last Friday. This is obviously not a good sign because it makes the US equity market more fragile and sensitive to small changes in sentiment in a few stocks. High index concentration also tends to be correlated with big breaks in financial markets as they transition to a new regime.

Source: Bloomberg and Saxo

Equities are reaching a turning point

While the equity indices are telling a different story than the one promoted by economists and the bond market there is one catch. The leading equity indices are all market-cap weighted. As the index concentration has risen so has the signal value from the equity market fallen, at least if you are only paying attention to the S&P 500. Beneath the surface of mega cap stocks the ocean of smaller stocks is telling a different story. The current is much cooler reflecting the realities in the economy.

The long-term relative performance between the S&P 500 and the S&P 500 Equal-Weight has been negative meaning that from the dot-com bubble days to around 2014 the equal-weighted index outperformed the market-cap weighted index. In other words, the smaller cap stocks outperformed. At around 2014 the cycle of index concentration accelerated and the S&P 500 has done better than the equal-weighted. The long-term trend is less important than the changes in the relative total return index over 26-weeks. Here we can see that S&P 500 has currently outperformed the equal-weighted index by 8.6% which is equal to the changes observed during the early days of the pandemic, the turnings points during the Great Financial Crisis (in November 2008 and March 2009), and during the LTCM crisis and the height of the dot-com bubble. So the market behaviour we are observing today has occurred during some of the most profound turning points in equity markets the past three decades. Where we go next is uncertain, but something big is happening under the surface of equity markets.

S&P 500 vs S&P 500 equal-weight | Source: Bloomberg and Saxo

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.