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There’s been an eerie quiet to the S&P 500’s volatility index (VIX) since the end of the first quarter. Currently, the S&P 500 VIX is up less than 1.7% since Q1’17. The price level on the S&P is up 3.74%. This means that the US bull market for stocks continues to climb a wall of worry with restrained levels of fear. However, the NASDAQ 100 Index shows a very different market experience. With the NASDAQ 100 VIX up nearly 20% since Q1’17, there’s a visceral divergence in risk and volatility expectations (see chart below) between the US technology sector versus the broader US market. Such historically rare divergence is not justified, as these two indexes are more alike than many market participants might realize.

As a matter of fact, the similarity is revealed when reviewing market leadership spots across both indexes. Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), and both classes of Alphabet stock (GOOG and GOOGL) are included in the Top 10 Holdings for both the NASDAQ 100 and the S&P 500. These 6 companies comprise more than 42% of the weighting of the NASDAQ 100, and 13% of the entire S&P 500. Together, worth more than $3.63 trillion, they have a market capitalization larger than all the listed companies in Germany and Canada, combined. Technology companies are not that much riskier than the broader market. Consulting valuation multiples affirm this assessment.

The Price/Earnings (P/E) ratio for the NASDAQ 100 (trailing twelve months) is at 25.75, for the S&P 500 23.94 (source: WSJ Market Data). Both reflect overvalued market pricing. Fundamentally, earnings are the primary driver of stock prices. The technology sector, more than any other S&P 500 sector, has greater opportunity to increase revenues globally, whether it be dollar devaluation currently underway or new user expansion. Regardless, the justification on such divergence is not readily obvious at an index level.

However, individual component companies within the NASDAQ 100, representing the other 58% of the index, tell us why the divergence appears. Smaller companies have been displaying daily market trading ranges in the 3 – 6% magnitude. Now, that’s really riding a rollercoaster! It’s only a matter a time before the broader market’s volatility reverts to its historical average, which is 15 (more than 50% higher than current levels).