'Too wonderful': Wall Street's 'fear index' at a one-year low. What's next?

The main indicator of fear on Wall Street - the volatility index Cboe (VIX) - during the year experienced rapid fluctuations, but by the end of 2025 reached an annual minimum, the publication MarketWatch paid attention. During trading on Tuesday, December 23, the index lost another 0.57% and closed at 14 points, its lowest level since December 2024.

VIX readings indicate that investors are feeling confident ahead of 2026, Little Harbor Advisors co-manager of portfolios Matt Thompson said, MarketWatch writes. While the VIX index typically tends to decline in December, this year's positive market sentiment before Christmas is justified by more than just seasonality, he added.

"In the last few days, headlines about artificial intelligence have become gradually more positive," the expert explained, noting that the market also "has a view that the [US] administration is going to spend money to support the US economy in 2026 ahead of the midterm elections."

In addition, MarketWatch continues, investor sentiment was supported by the December 23 U.S. GDP report, which showed that the U.S. economy grew at its fastest pace in two years over the summer. This may suggest that the U.S. economy - and indeed the global economy - may have overcome the crisis caused by the COVID-19 pandemic after several years of uncertainty, MarketWatch notes.

Also, the S&P 500 index on Tuesday, December 23, reached its 38th record level this year. The Nasdaq Composite and Dow Jones Industrial Average also rose for the fourth day in a row on that day. According to MarketWatch, Wall Street analysts expect the S&P 500 index to add another 10% on average next year.

However, even if the U.S. economy performs well in 2026, it does not necessarily guarantee a favorable outcome for investors, MarketWatch points out. Accelerating growth could put pressure on inflation, the publication notes, emphasizing that if inflation accelerates, it could convince the Fed to slow further interest rate cuts. As a result, the next year may not turn out the way Wall Street expects: "If inflation rises sharply and the Federal Reserve fails to cut interest rates, that could have a negative impact," Thompson noted.

"It just shows how complacent people are. Everything looks too great," commented Smead Capital Management CEO and portfolio manager Cole Smead on the performance of the Wall Street Fear Index and other similar investor sentiment indices.

Earlier, in late December, Bank of America's Bull & Bear Indicator rose from 7.9 to 8.5 points - according to some strategists, this level is already enough to trigger a sell signal in the market, contrary to the overall positive trend, MarketWatch writes.

Wall Street analysts' optimism about the U.S. stock market for 2026 is so unanimous that it has begun to alarm some market participants, Bloomberg reported Dec. 22. "If everyone expects the same thing, by definition, it's already built into market prices," Steve Sosnick, chief strategist at Interactive Brokers, said in comments to the agency.

This article was AI-translated and verified by a human editor