Can tech giants keep stock-market volatility suppressed?

Yes, when you’re the leaders of a cohort that’s greater than 40% of the S&P 500, you warrant getting two out of the five top charts to watch. 

One hallmark of 2024 was the extremely low realized correlation among members of the so-called Magnificent 7 stocks. That is to say, on a daily basis, these stocks tended to march to the beat of their own drums, despite all operationally doing a similar thing: spending billions to enhance their AI functionality in their respective key business lines — while Nvidia, again, is just raking in these dollars.

It’s particularly noteworthy that Tesla is the chief driver of lower correlations as of late. The last time it was this much of a unique snowflake versus this group was when the stock traded in a range for three years, compared to going straight up after the election. 

What were the consequences of this for the US stock market as a whole? Well, the implied and realized volatility of the S&P 500 is a function of how much individual stocks move and how much they tend to move in the same direction — that is, their correlation. The one-year rolling average of the one-month co-movement of the S&P 500’s top 50 constituents ended 2024 at a record low (based on data going back to 2011), and this phenomenon among the megacaps is a big reason why.

This dynamic has important implications for how much money some types of investors are willing to put into stocks. We live in a world where many hundreds of billions of assets under management are systematically tied to the volatility of what they own — so called vol-control funds or risk-parity strategies.

Whether due to a slide in the economy or some industry-specific common factor (say, a downward revision of the expected returns on AI investments), anything that raises the co-movement of tech giants is going to lower how much stock-market exposure those funds will have. And, as the clichéd line goes and the chart shows, in a crisis, correlations go to one.