Wall Street’s Fear Gauge Still Flashing Warning Signs as Middle East Conflict Weighs on Markets
U.S. stocks may have further to fall before the selling pressure triggered by the ongoing U.S.-Iran conflict fully runs its course, according to a new note from Wolfe Research strategist Chris Senyek.
The CBOE Volatility Index (VIX), widely known as Wall Street’s fear gauge, surged as high as 35.3 last Friday before pulling back to around 26. While the retreat offers some relief, a VIX reading in the mid-20s still signals that traders are bracing for significant market turbulence in the weeks ahead.
Markets Under Pressure Since Conflict Began
Investor anxiety has been elevated since the U.S.-Iran war broke out in late February. In the weeks that followed, the S&P 500 declined roughly 3%, while energy markets surged sharply. Both Brent crude and West Texas Intermediate futures have climbed around 40%, with Brent crude trading back near the psychologically significant $100 per barrel level.
Despite the broad-based selling, major equity indexes remain near historically elevated levels. The S&P 500 is currently sitting approximately 4% below its all-time high, which was set on January 28.
Wolfe Research: Maximum Fear Has Not Yet Been Reached
Senyek cautioned that despite the spike in the VIX, markets have not yet reached the level of fear typically associated with a durable market bottom.
Drawing comparisons to prior periods of extreme volatility — including the COVID-19 pandemic selloff and the Silicon Valley Bank collapse in 2023 — Senyek noted that in both cases, a sustained market recovery did not begin until the VIX climbed above 40. That threshold, he argues, represents true investor capitulation, a point at which panic selling exhausts itself and conditions become ripe for a rebound.
The VIX touched approximately 35 on an intraday basis on Monday, March 9, but has yet to breach the 40 level that Senyek views as a meaningful signal.
Private Credit Concerns Add to the Overhang
Beyond geopolitical risk, Senyek flagged growing concerns about cracks forming in private credit markets as an additional headwind for equities. The combination of conflict-driven uncertainty and emerging stress in private lending has led Wolfe Research to maintain a cautious near-term outlook.
“Elevated volatility from the conflict in Iran and growing worries over cracks emerging in private credit give us reason to believe that the near-term path for stocks remains to the downside,” Senyek wrote, advising investors against increasing exposure to higher-risk positions at this time.
What to Watch
According to Wolfe Research, two key developments would signal that the worst of the selling may be over: a VIX reading above 40, indicating investor capitulation, or concrete headlines pointing toward a resolution in the Middle East conflict.
Until one of those conditions is met, Senyek recommends that investors hold off on adding risk and remain patient as the market works through the current period of uncertainty.
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