Dissecting Recent Market Activity

With the recent US Equity sell-off, I wanted to examine some of the drivers and historical trends that are not as widely discussed behind recent market action.

First, let’s put the current sell-off in historical perspective. Sell-offs are common: they happen almost every year. In fact, in an analysis conducted by the Carson Group, the S&P 500 Index has averaged a 14% correction each year going back to 1980. Given the incredible US large cap bull market the past two years, it is easy to forget both years experienced 8%+ corrections, most recently in July/August 2024.

Source: Carson, YCharts 3/11/2025 (1980-Current)

There’s even an argument to be made for seasonality here. In years following 20%+ returns, the below analysis discovered that the S&P 500 Index tends to consolidate around March, with an average trough March 12. I caution against applying this historical pattern over the rest of the year, as the drivers for today’s selling are unique to say the least. However it is encouraging that action today is certainly not unprecedented and, in fact, may fall more in line with historical trends than we realize.

Source: Bloomberg Finance

Up to this point, the US equity sell-off has been entirely due to a growth scare – the fear that economic growth will decline as a result of tariffs and deteriorating geopolitical relations. These fears are manifested in the rapidly falling P/E ratio on the S&P 500. In fact, multiples have not fallen this rapidly at any time since the onset of the Covid pandemic. The key takeaway is that prices are lower because the price-to-earnings multiple which investors are willing to pay has fallen. Analysts are still expecting robust earnings growth throughout the remainder of the year, and price action does not (yet) reflect weaker earnings, only the fear of a potential lapse in growth. Much attention must be paid to near-term corporate guidance to assess the validity of this scare.

Source: Bloomberg, Barclays Research

VIX has risen to the mid-20’s. As a reminder, VIX represents how investors anticipate volatility based upon options pricing, with an increase in VIX indicating that investors expect higher volatility (and therefore more risk). When VIX is in the range we find it today, forward returns are weak historically. A historical analysis by Duality Research found that forward S&P 500 returns were the worst when VIX was in a range between 20 and 30. This VIX range is commonly associated with elevated (but not extreme) fear of expected volatility. And similar to today's sentiment, many investors are cautious at present, but not yet stampeding for the exits, which fits with VIX around the mid-20’s. Forward returns are highest when VIX is low (under 20) or very high (over 30).

Source: Duality Research, Bloomberg

One fascinating observation is how steady VIX has risen over the past two weeks going back to late February. In a panic or mass exodus from risk assets, VIX tends to pop higher in a very short period of time. For example, in the two week period leading up to the Covid outbreak in the US, VIX rose from 17 to 50. To hammer the point, on March 6 2020, VIX jumped from 34 to 49 in a single trading day. Over the past two weeks, we have witnessed a far more gradual and modest increase, from around 15 to 26, almost appearing like stair steps. This market pattern suggests that investors are not uniform in their short-term outlook and the sell-off is not a panic, at least thus far.

Source: Bloomberg

Credit spreads are also holding tight. Declining and low corporate bond spreads indicate a lower risk environment and are prevalent in equity bull markets, and that pattern has certainly been the case during the recent bull run. While spreads have widened a little in recent weeks, they remain very low historically, a sign that the bond market does not have quite the same fear as has been expressed in the US equity market. One note is how much EM credit spreads have widened in recent weeks, a trend for which I do not have an explanation at present.

Source: Ice Data Indices, LLC via FRED

Market rotation continues. The biggest concern I have from examining recent market rotation is the pivot between Consumer Staples and Cyclicals. The last few weeks have witnessed a rapid pivot between these two sectors. In prior instances, S&P 500 returns were rather lackluster. The below graphic from Sentiment Trader details out the returns in the 16 prior instances where the Consumer Staples sector snapped back in relative performance to Consumer Discretionary. On average, overall S&P 500 returns were negative 2.5% in the following 12 months after such a risk-off rotation. Note that rotation between cyclicals and staples has not historically been associated with massive declines in equity prices (such as GFC or Covid crashes).

Market rotation is perhaps the biggest story in global equity markets. What worked the past two plus years has not been working as well in 2025.

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Grant Johnsey

Grant is responsible for delivering capital market solutions to institutional clients across agency brokerage, transition management, security finance, and foreign exchange.

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