Investing.com -- JPMorgan strategists forecast the VIX index, often referred to as the fear gauge, to remain relatively subdued in 2025, projecting a median level of 16, below its long-term median of 17.6.
The outlook comes amid a continuation of the supply-driven dynamics that have suppressed volatility in recent years, despite macroeconomic and geopolitical risks that typically push volatility higher.
The bank attributes the muted VIX levels to robust technical factors, including a significant supply of short-dated volatility from option-based ETFs, 0DTE (zero days to expiry) strategies, and quantitative investment strategies (QIS).
These instruments have contributed to “suppressing both implied directly via the sale of options, and realized volatility due to dealers’ ensuing long gamma hedging,” JPMorgan strategists led by Tony Lee said in a note.
The growth of option-based ETFs, now managing approximately $140 billion in assets, is expected to further bolster this trend.
While these technical flows have dampened volatility, fundamental macro indicators suggest the VIX should be higher.
According to JPMorgan, "volatility levels tend to follow the levels of interest rates with an 18-24 month lag," and current macro data point to a fair VIX level of 19. However, the Federal Reserve’s rate cuts are unlikely to significantly affect volatility in 2025 due to delayed monetary transmission effects.
Policy and geopolitical uncertainties could trigger periodic spikes in volatility, the Wall Street firm warns.
The incoming US administration's shift in policy direction and lingering geopolitical risks add to this uncertainty. However, strategists note that it “remains unclear which changes will be adopted next year and to what extent these heightened policy risks will translate into higher average equity volatility levels.”
Moreover, JPMorgan highlights the potential for "flash crashes" as a key risk. The August 2024 VIX spike, the largest intraday on record, demonstrated how the supply of short-dated volatility could fail to contain sudden surges. Still, the bank expects technical flows to continue suppressing volatility during periods of market calm.