Volatility threatens top gainers including AMD and Micron

All is not calm in the stock market right now - despite appearances.

Investors don't see risk in the S&P 500. They see it in individual stocks. That's shortsighted.

With the U.S. stock market pushing ever higher, it is easy for investors to become complacent.

Except that cracks are starting to show - especially in technology shares. For example, Meta Platforms' stock (META) is trading near its 52-week low, while Micron Technology's $(MU)$ and AMD's $(AMD)$ are soaring. That's not tranquility. This widening gap between the market's winners and losers is called dispersion, in which one group of stocks rises while another falls, allowing the broader index to appear more stable than it really is.

The risk is real and increasing. Passive index funds probably carry more risk than people think - after all, the S&P 500 is a diversified index. However, three of its top 10 stocks right now are semiconductor names: Nvidia (NVDA), Broadcom $(AVGO)$ and Micron.

Troubled waters

There is a way to measure this risk using the S&P 500 dispersion index. It has only been higher than it is right now during periods of extreme market turmoil, such as the pandemic crash in March 2020 and the "tariff tantrum" in April 2025.

More specifically, this index measures implied volatility among stocks in the S&P 500 SPX. Right now, implied volatility across these stocks varies widely, meaning single-stock implied volatility is no longer in sync with the expected volatility of the index as a whole. In essence, investors don't see risk in the S&P 500. They see it in individual stocks.

Currently, implied volatility as measured by the Cboe Volatility Index VIX is reasonably low, around 17. The VIX is supposed to be the market's "fear gauge," and while 17 doesn't scream fear, it doesn't really suggest complacency, either. However, the VIX is quite low relative to the S&P 500 Constituent Volatility Index, a measure of single-stock implied volatility that is historically high, at nearly 46.

The spread between single-stock implied volatility (VIXEQ) and the S&P 500 implied volatility (VIX) is about the widest that has been observed since 2015. That spread is a warning sign that market risk is masked by stock-level volatility, and just because the S&P 500 is near its all-time highs doesn't mean all is calm.

Risk can reprice quickly

Periods of unusually low index volatility can leave markets vulnerable.

Periods of unusually low index volatility can leave markets vulnerable, because it often takes just one surprise to force investors to rapidly reprice risk. Suddenly we go from a calm market to one with gigantic price swings.

Ultimately, when a risk event occurs, dispersion unwinds and correlations between stocks and the index rise rapidly. Right now, the market has a low level of implied correlations as measured by the three-month implied correlation index, which is currently below 10.

The only other time the implied correlation index was this low was in the summer of 2024. That was followed by a period of strong market volatility after the Bank of Japan unexpectedly raised interest rates, causing the Japanese yen (USDJPY) to strengthen materially. It was a macroeconomic shock the market wasn't expecting.

When the market reprices quickly, sectors with the highest implied volatility are likely to be hit the hardest. In such a situation, the semiconductor sector could be the one to unwind the most. Shares of Micron and AMD, for example, have both more than doubled in price since the end of March. Expectations for artificial-intelligence spending continue to rise, valuations have expanded dramatically, and options activity remains among the highest in the market. Those same characteristics that fueled the rally could amplify the downside if expectations begin to reset.

Additionally, the sector's implied volatility level is extremely elevated. The Cboe Semiconductor ETF Volatility Index is about double that of the Russell 2000 Index RUT and the Nasdaq 100 Index NDX, and more than triple that of the S&P 500.

So look beyond the headlines. The S&P 500 and the stock market appear calm, but beneath the surface, concentration risk is building.

Michael Kramer is the founder of Mott Capital Management and a long-only investor focused on macro themes. He analyzes long-term macro trends and short-term market risk using technical analysis, fundamentals and options-market positioning.

(END) Dow Jones Newswires