History Backs Market Recovery
History shows that S&P 500 declines of +10% are often followed by positive returns. Despite short-term volatility, data since 1920s suggests markets typically recover, with average gains across 3 months to 2 years. Corrections are not always signs of downtime.
As equity markets scramble to reprice amidst a fiscal policy news storm, we are reminded of a fundamental principle: Every bull run will reach its end. However, that does not necessarily mean opportunity meets its end as well. After two years of exceptional performance from the S&P 500, investors are facing a reality they have not experienced in quite some time. On 13 March, the market officially entered correction territory, declining 10% from all-time highs. While some see it as a bad omen for what is ahead, history tells us a different story. Amidst a flurry of “sky is falling” rhetoric from news stories, it is important to consider that corrections are not always indicative of prolonged economic downturns.
Going back to the 1920s, there have been 25 instances where the S&P 500 had a greater than 10% pullback from all-time highs. Here, we show the subsequent returns over the following 3 months, 6 months, 1 year, and 2 years are skewed to being positive after the pullback.
Further, here we show the average forward returns after these 10% pullbacks. The main take-away is that on average, the index has positive returns over all subsequent periods. For periods that had subsequent positive returns, the 10% pullback ends up being fully reversed on average, even after just 3 months.
| Fwd 3-months return (after 10% Drawdown) | Fwd 6-months return (after 10% Drawdown) | Fwd 1-year return (after 10% Drawdown) | Fwd 2-year return (after 10% Drawdown) | |
| Avg Return (all periods) | 2.8 | 5.4 | 5.2 | 14.0 |
| Avg Return (when Up) | 9.5 | 14.8 | 17.1 | 24.5 |
| Avg Return (when Down) | (7.3) | (8.6) | (16.1) | (28.1) |
Source: FactSet, S&P, State Street Global Advisors. Data is from Jan-1928 until Mar-2025.
The point of this is not to dismiss the real possibility of further drawdown, particularly in the aftermath of a higher than expected tariff announcement by President Trump. Instead, we wanted to acknowledge that 10% corrections don’t have to be devastating to the portfolio. In fact, the hit rate and average forward return skews to the positive.