Now That the S&P 500 Has Experienced a Correction, What Will Happen Next? History Offers an Answer

The S&P 500 recently entered correction territory—defined as a decline of 10% or more from its most recent high. For investors, this milestone can spark concern, confusion, or even panic. But before making any rash moves, it’s worth taking a step back and asking a more productive question: What typically happens after a correction? As it turns out, history offers some compelling answers.

Corrections Are Common—and Often Short-Lived

Corrections might feel dramatic in the moment, but they are a normal part of market behavior. Since 1950, the S&P 500 has experienced a correction roughly once every 1.5 years. These pullbacks are not only common—they’re often brief. According to data from CFRA Research, the average correction lasts about four months and results in a decline of around 13%.

In most cases, the market recovers fairly quickly. In fact, many corrections are followed by strong rallies. A 2022 study by Goldman Sachs showed that, on average, the S&P 500 gained 15% in the 12 months following a correction.

Bear Market or Bounce Back?

Of course, not every correction leads to a quick recovery. Sometimes, corrections morph into bear markets (a drop of 20% or more from recent highs). The question investors always ask in the midst of a correction is: Will it get worse before it gets better?

History shows that while some corrections do precede bear markets, the majority do not. According to Yardeni Research, of the 24 corrections since World War II, only about 8 evolved into full-blown bear markets. The rest were temporary setbacks in the context of longer-term bull markets.

What distinguishes one from the other often has more to do with the economic backdrop than the market itself. Factors like rising interest rates, deteriorating corporate earnings, inflationary shocks, or geopolitical tensions can deepen a correction into a prolonged downturn.

What the Current Data Suggests

As of now, economic indicators are sending mixed signals. Inflation, while retreating from its highs, remains sticky. The Federal Reserve has paused rate hikes but maintains a hawkish stance. Corporate earnings continue to show resilience, but consumer sentiment has been shaky. The yield curve remains inverted, a traditional recession signal, though its predictive power has diminished somewhat in recent years.

In short: we’re in a period of uncertainty, and markets dislike uncertainty. But volatility does not necessarily mean a bear market is imminent.

Investor Behavior Matters More Than Market Moves

One of the biggest risks during a correction is not the market itself, but how investors respond to it. History is littered with examples of investors who sold at the bottom, locking in losses and missing out on the recovery. A Fidelity study found that investors who stayed fully invested through downturns saw significantly better long-term returns than those who attempted to time the market.

Warren Buffett put it best: "Be fearful when others are greedy, and greedy when others are fearful." While easier said than done, this mindset can help investors stay grounded when markets become turbulent.

What Should Investors Do Now?

1. Review, Don’t React: Use this time to reassess your portfolio and financial plan. Does your asset allocation still reflect your time horizon, risk tolerance, and goals?

2. Stay Diversified: Diversification remains one of the best defenses against volatility. Ensure your portfolio isn’t overly concentrated in one sector or asset class.

3. Keep a Long-Term Focus: Markets fluctuate in the short term, but over time, they trend upward. Since 1980, the S&P 500 has delivered an average annual return of about 10%, despite numerous corrections, crashes, and crises.

4. Consider Opportunities: For long-term investors, corrections can present buying opportunities. Quality stocks often go “on sale” during downturns, creating potential for future gains.

The Bottom Line

Corrections are unsettling, but they’re not unusual. In fact, they’re a healthy part of the market cycle, allowing valuations to reset and excesses to unwind. While no one can predict exactly what comes next, history provides a comforting precedent: most corrections are temporary, and patient investors are usually rewarded.

So rather than trying to time the bottom or exit the market entirely, a better question to ask is: Am I positioned to weather this and benefit from the recovery? Because if history is any guide, the market’s next chapter may be more promising than today’s headlines suggest.