Global Market Strategist
Last year, investors contended with every flavor of risk: tariffs, war, government shutdown and existential AI concerns. Yet the start of this year is rivaling all of last year, condensed into one quarter. This year, war has led to soaring gasoline prices, AI anxieties have bled into software, financials and private credit, a new Fed Chair waits in the wings and tariff uncertainty has been renewed with the IEEPA Supreme Court ruling.
Despite the concentrated chaos, the S&P 500 has experienced a maximum drawdown thus far of just 7%, compared to an average intra-year decline of 14.2% over the last 46 years, a sharp contrast to the 19% drawdown weathered in April 2025. The VIX has averaged 24.9 since the war broke out vs. 19.7 on average over the past 30 years. Yet, underneath the serene surface is a tempestuous undertow of sector and single-stock dispersion.
What lies beneath relatively benign S&P 500 index performance?
- Sector dispersion: Given the geopolitical shocks emanating from oil-sensitive countries, energy has been a breakout performer, up 35% YTD. However, five other S&P 500 sectors (materials, industrials, staples, utilities and real estate) are positive YTD, and all except real estate were up double-digits pre-war. Meanwhile, financials, discretionary and tech are all down high single-digits YTD, although have faced limited downside relative to other sectors since the war. Not only is there sector dispersion, but also significant intra-sector divergences. While financials are down nearly 10%, one-third of stocks in the sector are outperforming the S&P 500. Among the three growth-oriented sectors, 44% of stocks are outperforming the index. More than two-thirds of stocks in the top 5 sectors are beating the S&P 500, along with every stock within energy.
- Index vs. stock volatility: The average reading on the VIX in 2026 has been exactly in line with the long-term average cited above, whereas the VIX EQ1, which measures single-stock volatility within the index at the constituent level, is materially above its medium-term average2. For the five years prior to the pandemic, the VIX EQ averaged 25.6, but since 2021 has oscillated around 34.7, and sits at 40.5 currently. This elevated value reflects the growing single-stock dispersion.
- Single-stock dispersion: As we highlighted in our Weekly Market Recap last week, the average rolling 3-month pairwise correlation among stocks in the S&P 500 is 13%, lower than it’s been 98% of the time since 2022. Stocks are not only not moving lower in-sync, but like sector performance, many individual names are outperforming. Year-to-date, 56% of S&P 500 stocks are outperforming the index. If the year were to end today, that would be the highest share on a calendar year basis since 2022, and 2010 before that.
- Magnificent 7 dispersion: A distinct trend emerging since mid-2025 has been dispersion among the Mag 7, a cohort that moved synchronously higher in 2023 and 2024. Average rolling 3-month pairwise correlation peaked on May 30, 2025 at 78%, but has dropped to just 26% today after experiencing a 3-year low of 19% at the beginning of March. The Mag 7 are a monolith no more, and should be distinguished carefully.
Volatility and dispersion beneath the surface create opportunities within the equity market that may not be obvious at the index level. While the macro outlook remains cloudy, one thing is clear: the environment is ripe for stock picking and active management.