This study explored how patterns of physiological stress reactivity underpin individual differences in sensitivity to early rearing experiences and childhood risk for psychopathology. To examine individual differences in parasympathetic functioning, past research has largely relied on static measures of stress reactivity (i.e., residual and change scores) in infancy which may not adequately capture the dynamic nature of regulation across contexts. Using data from a prospective longitudinal study of 206 children (56% African Americans) and their families, this study addressed these gaps by employing the latent basis growth curve model to characterize the dynamic, non-linear patterns of change in infants' respiratory sinus arrhythmia (i.e., vagal flexibility) across the Face-to-Face Still-Face Paradigm. Furthermore, it investigated whether and how infants' vagal flexibility moderates the links between sensitive parenting, observed during a free play task when children were 6 months of age, and parent-report of children's externalizing problems at 7 years of age. Results of the structural equation models revealed that infants' vagal flexibility moderates the predictive relations between sensitive parenting in infancy and children's later externalizing problems. Simple slope analyses revealed that low vagal flexibility, characterized by less suppression and flatter recovery patterns, exacerbated risk for externalizing psychopathology in the context of insensitive parenting. Children with low vagal flexibility also benefited most from sensitive parenting, as indicated by the lower number of externalizing problems. Findings are interpreted in the light of the biological sensitivity to context model and provide evidence for vagal flexibility as a biomarker of individual's sensitivity to early rearing contexts.