Middle East tensions are rising—so why are markets so calm? The low VIX puzzle explained

Global markets are displaying an unusual level of calm despite escalating geopolitical tensions in the Middle East, a trend that is increasingly puzzling fund managers. According to a recent “GREED & fear” note by Jefferies, most investors are surprised by how little volatility has emerged in response to the ongoing news flow.

The report highlights that interactions with fund managers suggest a clear takeaway: markets are behaving far more resiliently than historical patterns would suggest in the face of such geopolitical risks.

Volatility stays in check

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The clearest signal of this calm is the CBOE Volatility Index. During the recent phase of tensions, the VIX rose to 35.3, but that move was short-lived. It has since cooled to around 18.2, a level more consistent with stable market conditions.

To put that in perspective, the same index had surged to 60.1 during last year’s tariff-related turmoil. The current reading suggests that investors are not pricing in a prolonged or severe escalation.

Earnings doing the heavy lifting

Behind this resilience is a steady flow of earnings upgrades, especially from the technology space. Companies linked to artificial intelligence continue to report strong demand, lifting overall expectations.

Estimates for the S&P 500 now point to 13.9 per cent earnings growth for the March quarter, higher than what was expected a few months ago. The IT sector alone is seen growing profits by over 46 per cent, with chipmakers leading the charge.

Stocks such as Nvidia remain central to this story, benefiting from the ongoing AI spending cycle.

Bond market adds stability

The bond market is also playing a supportive role. After a brief spike, volatility in US Treasuries has eased. The MOVE index, which tracks bond market swings, has fallen back to around 67.94 after touching 108.84 in March.

At the same time, the US 10-year yield continues to trade within a narrow range, with 4.5 per cent acting as an important marker. As long as yields stay below this level, equities tend to find support.

Calm on the surface, cracks underneath

Even so, not everything looks as steady beneath the surface. Consumer sentiment in the US has slipped to 47.6, one of its weakest readings, while inflation expectations have moved higher.

Housing activity is also showing signs of strain, with home sales declining and mortgage demand softening. These trends point to a more cautious consumer environment.

A market leaning on a few pillars

What stands out is how much of the market’s strength is coming from a narrow set of drivers mainly tech earnings and AI-related spending. That has helped keep indices stable, but it also means the cushion is not very broad.

For now, investors appear willing to look past geopolitical risks, comforted by earnings growth and stable financial conditions. But the situation bears watching. A shift in bond yields, a slowdown in tech earnings, or a further escalation in global tensions could quickly change the mood.

Bottom line

The calm in markets is real but so is the surprise around it. With volatility back near normal levels and earnings still holding up, equities are staying resilient. The question is how long that balance can last.