Corrections Are Often Followed by Strong Rebounds

The S&P 500 slid into correction territory on Thursday, as uncertainties over tariffs and growing fears of an economic slowdown, a recession or even a period of stagflation weighed on investor confidence for the past few weeks. The index closed at 5,521.5 points on Thursday, down 10.1 percent from its all-time high on February 19. 

It's the first correction since October 2023, when it took the S&P 500 almost three months to slide 10 percent from it’s the previous high as opposed to just three and a half weeks this time around. The latest pullback means that all of the index’s gains since the November 2024 election – the so-called Trump bump – have been erased, as the new administration’s policies, especially in terms of trade, have unsettled investors by sowing uncertainty over the trajectory of the U.S. economy and the future prospects of U.S. companies heavily reliant on global supply chains and free access to international markets.

While some see the latest correction as a sign of worse things to come – a bear market or a fully blown market crash of 2000 dot-com bubble proportions – others see the pullback as long overdue in a market that got carried away by AI euphoria. Historically, things could go either way. Reuters and Yardeni Research found that 22 of the 56 S&P 500 corrections that occurred since 1929 preceded a bear market, i.e. a decline of 20 percent from recent highs, while 34 corrections did not lead to worse things. 

More recently, the Motley Fool found that corrections were often followed by strong rebounds in the twelve months that followed. In nine corrections since 2010, the S&P 500 returned an average of 18 percent the following year, with only the 2022 correction followed by a further decline. The latest one, that saw the index close in correction territory on October 27, 2023, was followed by a 41 percent rally over the next 12 month – an outcome that investors will be hoping for this time as well.