These Two Market Indicators Are Flashing Warning Signals For US Stocks

The Cboe Volatility Index (VIX) jumped to a three-month high of 18.46 yesterday as the Q2 earnings season began with lacklustre reports from Tesla and Alphabet, triggering a sell-off in the US stock market. The VIX, or the fear gauge, measures the demand for protection against stock fluctuations.

The S&P 500 dropped 2.3%, while the tech-heavy Nasdaq 100 fell 3.5% amid concerns about the sustainability of the year-long AI rally. The latest sell-off reflects the stock market's susceptibility to downturns in Big Tech as company stocks climbed higher to date on the AI hype despite extremely high valuations.

Meanwhile, legendary investor Warren Buffett's stock market valuation indicator reached a record high of 200%, implying that stocks are highly overvalued. In late 2021, the indicator reached the then-all-time high of 197%, shortly followed by a year-long bear market. The "Buffett Indicator" divides the total US stock market capitalisation by the latest quarterly GDP estimate. Buffett said the metric is "probably the best single measure of where valuations stand at any given moment." The indicator reached as high as 190% during the 2000 dot-com bubble.

Semper Augustus president Chris Bloomstran recently said there may be "utility to it [Buffett's Indicator], but investors must apply an "upward trend channel" to the metric to factor in today's economy compared to previous eras of lower corporate margins and different inflation levels.

Analysts Say There's Nothing To Panic About

Despite the volatility, industry experts view the development as an orderly retreat. "We're not seeing a whole lot of fear in the marketplace, meaning that people aren't going out and trying to buy protection aggressively," said Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald. "It's kind of very orderly and kind of passive, which indicates to me that nobody's in a bad spot right here yet."

He believes that solid stock market returns in recent months might help investors overcome the latest uptick in volatility. Meanwhile, Dan Ives, senior equity research analyst at Wedbush Securities, described the tech sell-off as a "golden buying opportunity" for long-term investors. The stock market volatility was also partly triggered by former President Donald Trump's recent comments on tariffs and Taiwan. Still, Ives said the former President's rhetoric can represent more "bark than bite."

Meanwhile, Principal Asset Management's Todd Jablonski sees the sell-off as a tiny blip in the AI wave and a potential Trump Administration won't impact the momentum of US tech giants. He believes such volatility is typical during election seasons.

Tesla Stock Plunges, Alphabet Misses Estimates

Tesla share prices fell by 12% yesterday to close at $215.99 after the EV maker posted a decline in auto revenues and adjusted operating income for Q2, citing a "difficult operating environment."

Meanwhile, Google-parent Alphabet's stock price fell 5% despite beating earnings estimates. The company missed advertising sales estimates for YouTube and invested much more cash into AI than analysts expected. There are growing concerns about whether Alphabet can improve margins in the coming months.

Political uncertainty, combined with the scope for potential rate cuts and emerging signs of weakness in the tech stock rally, can prompt many investors to seek portfolio protection. However, Wedbush's Ives believes that Q2 earnings will propel the tech industry forward, and tech stocks could climb another 15% this year.

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