The S&P 500 (^GSPC -2.24%) is off to a rough start to 2025. It was recently down by as much as 19% from its all-time high, narrowly avoiding bear-market territory before staging a modest recovery.
The index is coming off an incredible two-year run in 2023 and 2024, delivering back-to-back annual gains of more than 25%. The only other time investors enjoyed such strong returns from the benchmark index was during the dot-com internet boom in 1997 and 1998, so the recent pullback is probably healthy — after all, markets don’t rise in a straight line.
However, there are some short-term headwinds that could breed more uncertainty. On April 2, President Donald Trump announced a series of tariffs on products coming into the U.S., which accelerated the decline in the S&P 500 as investors trimmed their exposure to stocks out of fear that trade tensions could trigger a global economic slowdown.
Analyst firm Oppenheimer went into 2025 predicting the S&P 500 could reach 7,100, which was the highest target on Wall Street. But the firm slashed its forecast earlier this month, citing Trump’s tariffs as one of the key reasons. History offers a very clear playbook for dealing with stock market volatility, so here’s what investors might want to do next.
Image source: Getty Images.
Déjà vu
A sweeping 10% tariff on all products imported into America went into effect on April 5, and a series of much higher “reciprocal tariffs” followed on April 9, which were imposed on specific countries with large trade imbalances with the U.S. However, Trump recently paused the reciprocal tariffs (except those imposed on China) while his administration negotiates trade deals with other countries.
Trump’s goal is to encourage more companies to manufacture their products in America, but this could take years to play out. In the meantime, tariffs immediately increase the price of the goods consumers buy every day, which is almost certain to alter their spending patterns. This could deal a blow to economic growth and corporate earnings, which is why investors rushed to sell stocks after the tariffs were announced.
But this isn’t the first time Trump has sparked trade tensions. During his first term in office in 2018, he enacted a series of tariffs that affected 12.6% of America’s total imports and included levies on materials like steel and aluminum from every country in the world. The policy contributed to a 19.8% decline in the S&P 500, so investors might be feeling a sense of déjà vu right now.
Thanks to the benefit of hindsight, we know the stock market went on to make new highs after the 2018 sell-off. The truth is, history proves the root cause of a stock market decline rarely matters for investors who own a diversified portfolio. Over the last 25 years, there have been four bear markets (declines of 20% or more) in the S&P 500, triggered by four very different events:
- The dot-com internet bubble (and subsequent bust) in 2001
- The global financial crisis in 2008
- The COVID-19 pandemic in 2020
- The inflation crisis in 2022
The S&P 500 eventually emerged from every single one of those bear markets and set new record highs.
Oppenheimer isn’t alone
Despite the stellar long-term track record of the S&P 500, Wall Street firms must cater to the needs of their clients. Many of them have to make near-term decisions about their stock holdings, whether they need to sell some to fund their retirement or unlock cash flow for their businesses. As a result, these firms make short-term forecasts for the S&P 500 that they update throughout each year to reflect changes in the broader economy and corporate earnings picture.
Oppenheimer’s initial S&P 500 target of 7,100 for 2025 implied another above-average annual return of 20.7%. However, the simmering global trade tensions prompted the firm to revise its target down to 5,950, and it isn’t alone:
- Yardeni Research recently slashed its 2025 target for the S&P 500 from 7,000 to 6,400, and then again to 6,000.
- Goldman Sachs cut its target from 6,500 to 6,200, and then again to 5,700.
- Barclays trimmed its target from 6,600 to 5,900.
- UBS reduced its target from 6,400 to 5,800.
- RBC Capital Markets lowered its target from 6,600 to 5,500.
The S&P 500 ended 2024 at a price of 5,881, so Oppenheimer’s new target implies a potential upside of just 1.2% this year. The new targets from Goldman, UBS, and RBC Capital Markets all suggest the index will end 2025 with a loss instead.
Here’s what investors should do, based on decades of history
Earlier I highlighted how the S&P 500 bounced back from four bear markets over the last 25 years. But if you look all the way back to the 1950s, you’ll find even more evidence that volatility is simply a natural part of the investing journey.
According to Capital Group, the S&P 500 suffers a decline of 20% or more every six years, on average. Corrections of at least 10% are far more common, occurring once every two and a half years. And investors can expect a 5% sell-off around once per year. These gyrations are the price investors pay for an opportunity to earn excellent compounding returns over the long run, which can significantly improve their financial standing.
The S&P 500 has delivered a compound annual return of 10.3% since it was established in 1957 in spite of all the sell-offs, corrections, and bear markets along the way, so the lesson is to stay the course and play the long game. As was the case with every other market blip throughout history, investors will probably look back on the volatility in 2025 and wish they had used it as a buying opportunity.