Wall Street's fear gauge saw one of its steepest drops in history as tariff risks dissipated this week

• Wall Street's fear gauge saw its quickest-ever decline over a 21-day period amid the trade chaos.
• Market panic rapidly gave way to optimism after the US and China agreed to dial down tariffs.
• Stocks have historically rallied higher after similar VIX declines in the past, Bespoke Investment Group told BI.

Fear on Wall Street has never dissipated so quickly.

The CBOE Volatility Index, a measure of market volatility commonly referred to as the stock market's fear gauge, saw its fastest-ever drop from April 10 to May 12, according to an analysis from Bespoke Investment. In that time, the index plunged from above 40 to below 20. It was one of only four times the VIX fell from a level above 40 to below 20 in under 100 days.

The VIX peak at 52.33 on April 8 — the day the stock market bottomed following Donald Trump's "Liberation Day" tariffs. It was hovering around 18.22 on Wednesday.

Last month's spike in the VIX sent it to the highest level since the pandemic.

What it means

Sentiment on Wall Street has improved rapidly on news that the US and China would dial back tariffs for 90 days. The deal sparked a major rally in stocks and alleviated some investor concerns about the impact of the trade war on the US economy.

Paul Hickey, co-founder of Bespoke, suggested it was possible investors are being overly optimistic about progress on trade.

"There's always concerns that, as quick as these tariffs can come and go — as quick as they can go away —- they can come back again," he told Business Insider.

Still, he thinks the indicator reflects a more positive outlook for stocks in 2025.

In each instance that the VIX has seen a 20-point decline in under 100 days, the S&P 500 traded higher over the next year.

"We're likely to see some gains. They're going to be harder to come by this year versus other years," he said, pointing to the market's rally of over 20% in 2023 and 2024. "But just because the market doesn't go up 20%, doesn't mean it can't still go up," he said.

Forecasters on Wall Street have turned slightly more bullish on stocks, despite lingering tariff uncertainty.

Goldman Sachs revised its year-end outlook for the S&P 500 to 6,500 this week, up from its prior forecast of 6,200. The bank cited lower uncertainty and lower inflation expectations, as well as higher earnings growth and renewed confidence in the US market.

Ed Yardeni, a longtime market veteran, also revised his year-end outlook for the benchmark index up to 6,500 from his prior 6,000 call, citing higher expectations for growth in the US economy.