The Stock Market's "Fear Gauge" Says the S&P 500 Will Make a Big Move in the Next Year (Hint: It's Good News)

The S&P 500 (^GSPC 0.52%) has now declined in four consecutive weeks, leaving the index nearly 6% below its record high. Apart from energy stocks, it's been a challenging year for equities across the board, though losses have been more pronounced in certain sectors.

Collectively, those concerns have created a great deal of volatility in the stock market. The CBOE Volatility Index (^VIX +6.08%) -- often referred to as the stock market's fear gauge -- closed at 29.5 in early March. The index has not closed above 29 since President Trump announced sweeping tariffs last April.

However, VIX readings above 29 have historically correlated with substantial upside in the stock market. Here's what investors should know.

The CBOE Volatility Index (VIX) measures the expected volatility of the S&P 500, with higher readings implying larger price swings. Its value at any given time depends on how much investors are willing to pay for S&P 500 options contracts. A VIX of 29 means investors expect the S&P 500 to move up or down by 29% over the next year.

The VIX closed at 29.5 on March 6, marking the 265th time the index closed above 29 over the last 15 years. That hints at substantial forward returns in the stock market. In the last 15 years, the S&P 500 has recorded an average 12-month gain of 24% following a VIX reading above 29.

What does that mean for investors? When the VIX closed at 29.5 on March 6, the S&P 500 closed at 6,740. Advancing 24% from that level would bring the stock market benchmark to 8,358 by early March 2027, which implies 27% upside from its current level of 6,582.

Wall Street expects a similar move in the S&P 500 during the next year. The bottom-up consensus forecast -- meaning the value implied by aggregating the median target price on every stock in the index -- says the S&P 500 will reach 8,338 by March 2027, according to FactSet Research. That implies nearly 27% upside from its current level.

However, that bottom-up consensus is based on expectations that S&P 500 companies will collectively report earnings growth of 16.3% in 2026, an acceleration from 13.8% in 2025. Wall Street analysts may reduce their forward earnings estimates if the U.S.-Iran war keeps oil prices elevated.

Last week, Moody's chief economist Mark Zandi warned that conflict in the Middle East could even tip the U.S. economy into a recession. "If oil prices remain elevated for much longer (weeks, not months), a recession would be difficult to avoid." In that scenario, history says the S&P 500 would fall sharply over the next year.

Here's the big picture: Investors tend to overreact to bad news, so the stock market often performs well after periods of elevated volatility. However, past performance is not a guarantee of future results. Rising oil prices could cause corporate earnings to grow more slowly than Wall Street anticipates, in which case the upside implied by a VIX reading above 29 may not materialized.

Either way, investors should stick with what works best: Buy and hold high-quality stocks no matter what happens in the near term.