Key Points

• The VIX, or Wall Street’s “fear gauge,” is trading below 14 and set to end 2025 at its lowest level of the year, indicating investor confidence.

• The VIX surpassed 52 in April, its highest end-of-day level since April 2020, reflecting earlier market volatility.

• Strategists anticipate the S&P 500 will increase by another 10% in 2026, despite potential inflation and interest-rate uncertainties.

The Cboe Volatility Index, better known as the VIX or Wall Street's "fear gauge," is on track to finish 2025 at its lowest levels of the year - after a wild ride that had sent it to its highest level since 2020, by one measure.

That means investors are felling confident heading into 2026, said Matt Thompson, a co-portfolio manager at Little Harbor Advisors alongside his brother, Mike Thompson. While the VIX VIX tends to trend lower in December, this year's good cheer heading into Christmas is justified beyond certain seasonal quirks, he noted.

The VIX finished at 14 on Tuesday, its lowest end-of-day level since December 2024, Dow Jones Market Data showed. Back in April, the index hit a 52-week high of 52.33, the highest end-of-day level since April 2020. As of Tuesday, the VIX was on track to finish 2025 within 2% of its calendar-year lows for the first time since the index was introduced in 1990.

The S&P 500 SPX tallied its 38th record high of the year on Tuesday as it climbed for a fourth-straight day, Dow Jones Market Data showed.

The Nasdaq Composite and Dow Jones Industrial Average DJIA also tallied a fourth day of gains, while the small-cap Russell 2000 RUT pulled back, losing some steam after its latest run higher.

If historical trading patterns hold, the large-cap benchmark index could finish 2025 in record territory, even as the tech-heavy Nasdaq Composite COMP has continued to trade below its peak levels from October.

Many investors have interpreted the fact that more stocks have recently joined in the stock-market rally as a promising sign. Financials and materials stocks have charged higher over the past month, and even the small-cap Russell 2000 RUT recently hit back-to-back record highs. On Wall Street, strategists generally expect the S&P 500 will tack on another 10% in 2026, according to forecasts tracked by MarketWatch.

Many artificial-intelligence names, including semiconductor stocks, have struggled recently - but a recent turnaround has helped lift investors' spirits ahead of the Christmas holiday.

"The AI headlines have gotten incrementally more positive over the past few days, and there is this view that the administration is going to spend money to support the economy in 2026 ahead of the midterms," Thompson told MarketWatch.

Investors are embracing signs that the U.S. economy - and indeed, the global economy - may have turned a corner after years of post-COVID uncertainty. Tuesday's GDP report showed the U.S. economy grew over the summer at the fastest pace in two years.

The outlook for next year looks promising, too. Despite signs of persistent labor-market weakness, consumers have continued to spend, and President Trump's One Big Beautiful Bill Act is expected to leave more money in people's pockets. In the market, some consumer-focused names have started to recover after struggling earlier in the year, while the Federal Reserve raised its median forecast for 2026 GDP growth earlier this month.

Rate-cut doubts

But even if the economy is doing well in 2026, that doesn't necessarily guarantee a good outcome for investors.

A faster pace of growth could put upward pressure on inflation. If inflation picks up, it could convince the Fed to slow down further interest-rate cuts. That could see next year turn out very differently than many on Wall Street are expecting.

"If inflation jumps up and the Fed can't cut rates, that could hinder things," Thompson said.

Too confident for their own good

The VIX is based on a formula that takes into account trading activity in S&P 500 options contracts. Sentiment gauges based on other inputs were suggesting that investors' confidence might be verging on complacency.

Bank of America's bull-and-bear indicator recently rose to 8.5 from 7.9 - high enough to trigger a contrarian "sell" signal, according to several strategists.

"It just shows how complacent people are. It's very hunky-dory," said Cole Smead, CEO and portfolio manager at Smead Capital Management, when asked by MarketWatch about the level of the VIX and other popular gauges of investor sentiment.

AI trade splinters

Over the past two years, more stocks - including utilities, industrials and other names outside the broader technology and semiconductors space - had started to climb on the expectation that their businesses could also benefit from the billions of dollars being poured into building AI data centers.

But recently, the AI trade has started to splinter. Ed Yardeni, founder and president of Yardeni Research, recently dropped his overweight rating on the technology and communication-services sectors after 15 years, arguing that Big Tech giants - specifically, those known collectively as the "Magnificent Seven" - were increasingly facing competition from each other and from other large-cap firms.

"The Magnificent Seven kingdoms, each surrounded by moats, rarely had threatened each other's monopolies in the past. Now, with the advent of AI, they have been encroaching on each other's previously sacrosanct fiefdoms, forcing one another to spend ever more to remain in the game," Yardeni said in commentary shared with MarketWatch earlier this month.

If investors start to see the race for AI supremacy as more of a zero-sum game, that could also create problems for indexes like the S&P 500, Thompson said. He pointed to the front-month VIX futures contract, set to expire in January, as evidence that some fear remained in the market. The contract was trading at around 17 on Tuesday; that is low relative to history, but higher than the VIX index itself.