Earlier this week, I talked a bit about the “too low” VIX.

It’s a familiar discussion. At regular intervals over the past year, market participants have expressed varying degrees of incredulity at a “fear gauge” that refused to telegraph any fear. Ostensibly, that was odd given that 2022 was a scary year in many respects.

But it was that very fear, along with a monetary policy regime shift which disincentivized leveraged long positions in financial assets, which prompted investors to trim their exposure and raise their cash allocations. When you have no exposure, there’s no downside to hedge. And to the extent you need a hedge, your cash position is that hedge. Hence subdued demand for downside protection.

More recently, a series of technical factors conspired to push the VIX to the lowest levels since 2021. I enumerated those factors here on Thursday.

But there’s another, simpler, explanation for subdued volatility: Corporate profits still haven’t rolled over. “Profit margins for corporations are cyclical — they rise going into a recovery, peak around the middle of the cycle and then fall sharply going into recession,” SocGen’s equity derivatives team remarked on Friday, editorializing around the margin trajectory shown in the visual below.

As you can see, corporate profitability isn’t receding commensurate with the typical path.

“From this vantage point, the subdued level of equity volatility should not seem surprising,” SocGen’s Jitesh Kumar and Vincent Cassot said, adding that looking ahead, “margins [should] come under pressure, but we expect this process to take some time.”

This comes back to the “Greedflation” debate and, more specifically, to when corporate pricing power in the US will finally start to wane. I said this week that Greedflation is probably on “borrowed time.” But flash PMIs for April released on Friday morning in the US told a different story.

With margins at or near record highs and consumers still willing (and able) to pay higher prices, the so-called “Wile E. Coyote” moment for the economy may still be several quarters away. If that’s the case, I suppose it makes sense that “fear” has once again gone into hibernation.