What can history tell us about elevated fear in markets?

Last week’s technology sell-off wiped out more than $2 trillion of market value, leaving investors heading for the exits on fears about the sustainability of the AI buildout after the ‘blue wave’ victory in the midterm elections.

Sharp downdrafts in markets can be caused by ‘capitulation’: a panic selling in markets during a downturn. Hedge funds can aggravate this as they quickly cut positions and reduce risk.

Sharp selloffs like this can be healthy. They can wipe out the froth and leave share prices closer to what companies are really earning. But they can also be an early warning that more pain is on the way. Until we know which of these options the market is experiencing, investors are likely to feel uneasy.

However, looking at history can reveal some common patterns in these types of events. A popular measure of the amount of fear coursing through markets is the Vix.

When it jumps above 25, investors are pricing in unusually large daily swings in the S&P 500 of around 120 points (1.6% based on an index level of 7,500).

For context, the Vix has averaged 19.4 since 1990, equivalent to daily volatility of 1.2%.

Does a spike over 25 always signal a clearing event?

There have been 50 occasions over the last 35 years when the Vix has spiked over 25. Only around a third of the time does the S&P 500 produce a positive return over the following month.

Positive market returns are effectively coin flips over subsequent three to six months, which suggests elevated fear can hang around, with the potential for new market lows.

However, when we look out over the next two years, the S&P has delivered a positive return in roughly seven out of 10 cases, with an average return of 12.7% and a median (typical) return of 19.2%.

While this suggests a Vix over 25 may indicate markets are beginning to clear excessive optimism and reprice risk, it’s not a dependable signal that a low has been reached on its own.

What are the exceptions to capitulation episodes?

While two thirds of cases saw a typical total return of 19% over two years, in the other third, markets were dragged down by severe bear markets such as the dotcom bursting in October 2000.

It is therefore important to distinguish between situations which have systemic economic causes like the unwinding of the technology bubble, the banking crisis of 2007 or a prolonged earnings contraction.

The best two-year outcome of 53% followed a spike in the Vix which was related to the Silicon Valley Bank crisis in March 2023. Swift intervention by the Federal Reserve and other authorities contained the problem, preventing further panic.

This is an example of a clearing event which showed that once investors regained confidence, the broader equity market was able to recover.

How does the current Vix spike fit into history?

The recent jump in the Vix reflects market concerns that vast AI investments will not generate adequate returns, which has been compounded by a possible slowdown in data centre construction following the ‘blue wave’ in the midterm elections.

These seem legitimate concerns given increased spending and borrowing, while valuations leave little room for disappointment, and the financing of the AI ecosystem has become increasingly interconnected.

The counterargument is that AI demand remains strong, and the market is seeing a ‘healthy’ repricing of expectations which got too far ahead of themselves.

The longer-term AI opportunity remains substantial and history cautions that the current readjustment process may take longer and involve further price volatility before becoming clear.

Which stocks are the biggest casualties?

The epicentre of the sell-off were the chipmakers. The Philadelphia Semiconductor index of leading chipmakers fell as much as 14% on 5 November. However, weakness has been building since the summer.

The biggest fallers in the S&P 500 index since June 2026 have been the makers of specialist high bandwidth memory chips used in building AI data centres, such as SanDisk.