NEW YORK — The U.S. stock market has recently experienced a decline of 10% from its peak last month, driven by concerns over the economy and the impact of a potential global trade war.
The drop in the S&P 500 is significant enough for Wall Street to label it a “correction.” Historically, such declines have been a regular occurrence for over a century, with market experts often viewing them as a necessary pullback from excessive optimism that, if unchecked, might push stock prices too high.
However, while corrections can be beneficial for the market, they are often alarming for investors, especially those new to the market who have only seen stock prices rise.
The S&P 500 had enjoyed two consecutive years with impressive gains exceeding 20%, which some critics felt made the market overly expensive as stock prices outpaced corporate profit growth.
A correction might temper some of the speculative enthusiasm among day traders, but there is always a larger concern that it could prelude a “bear market,” defined as a drop of at least 20% by Wall Street.
Let’s explore the historical context of past corrections and speculate on future market expectations.
The recent market correction was initially triggered by a surge in U.S. stock prices following President Donald Trump’s election, fueled by optimism for his policies promising lower taxes, reduced business regulations, and enhanced corporate profits.
However, these gains have since evaporated as Wall Street contends with the negative economic implications of Trump’s administration.
President Trump’s rapid changes in tariff policies have created confusion, placing tariffs on trading partners, then offering exemptions, and subsequently re-imposing them.
Such actions could impact every trading nation with the U.S., elevating prices for American households and businesses amidst existing stubborn inflation.
The concern is that these tariffs might slow, or even halt, the strong growth trajectory the U.S. economy had at the close of 2024.
Even if less severe tariffs are implemented, the prevailing uncertainty could dampen economic activity.
These worries are reflected in recent consumer confidence metrics and in companies’ profit forecasts.
The unpredictability is complicating the Federal Reserve’s actions, which had been reducing interest rates after nearly hitting its 2% inflation target.
Though further rate cuts could benefit the economy, they might also prompt inflation to rise.
This sell-off has notably affected stocks deemed overvalued following surges driven by excitement over artificial intelligence advancements.
Nvidia, for example, has decreased roughly 14% so far in 2025, following a meteoric 800% rise over 2023 and 2024.
The “Magnificent Seven” stocks that have dominated market performance recently have similarly lagged behind the broader S&P 500.
These seven stocks alone accounted for over half of last year’s S&P 500 returns.
Corrections, on average, occur every couple of years.
Even during an unprecedented 11-year bull market run for U.S. stocks from March 2009 to February 2020, there were five corrections according to CFRA data.
Various concerns, ranging from interest rates and trade wars to European debt crises, instigated these setbacks.
The most recent market correction occurred in 2023 when the S&P 500 fell 10.3% from late July through October.
At that time, rising Treasury yields dampened stock prices as traders adjusted to the idea of prolonged high Federal Reserve rates.
Despite this, stocks rebounded quickly as optimism grew regarding potential rate cuts.
The most recent correction to turn into a bear market was in 2022 when the Federal Reserve began increasing interest rates to combat historically high inflation rates.
This sparked fears of a potential recession due to rapidly rising rates, though such a recession never materialized.
During the 2022 bear market, the S&P 500 fell 25.4% from January 3 to October 12.
When analyzing corrections that don’t result in bear markets since 1946, the S&P 500 takes about 133 days on average to bottom out, experiencing an average loss of nearly 14%, according to CFRA.
The index typically takes about 113 days to recover its losses.
In contrast, bear markets are significantly more damaging.
Since 1929, the average bear market-like downturn has spanned nearly 19 months, resulting in a 38.5% loss for the S&P 500, according to S&P Dow Jones Indices data.
Historically, bear markets can severely reduce investors’ portfolios.
For instance, from late 1929 through mid-1932, the stock market plummeted by more than 86%.
Bear markets can also feel interminable, as illustrated by one lasting over five years from 1937 to 1942, where U.S. stocks decreased by 60%, according to S&P Dow Jones Indices.
In Japan, the Nikkei 225 index achieved a peak at the end of 1989 before it plummeted, taking decades to recover fully.
It wasn’t until 2024 that the index regained that lost ground.
However, Japan’s experience is unusual.
In nearly all U.S. stock market downturns, investors who held steady and refrained from selling recouped their losses.
This included the 2000 dot-com bust, the 2008 financial crisis, and the 2020 coronavirus-related market collapse.
What lies ahead remains uncertain.
Some on Wall Street anticipate President Trump might reconsider certain policies if they become too detrimental, while others believe the ongoing uncertainty is already significantly painful.
The economy remains somewhat robust at the moment, as evidenced by last month’s employment reports, but the future outlook is less clear given the numerous uncertainties.
