The S&P 500’s record-breaking rally has hit a wall. After closing at an all-time high of 6,144 on February 19, the benchmark index has dropped nearly 6% amid escalating trade tensions. Investors are rattled as President Donald Trump’s latest tariffs on Canada, Mexico, and China take effect, with the European Union potentially next in line. Retaliatory tariffs from affected nations have only added to the uncertainty, setting the stage for a prolonged market shakeup.
A Market That’s Seen This Before—But Can It Bounce Back?
Market downturns aren’t new. In fact, history suggests that short-term drops like this tend to be temporary. Goldman Sachs research from last year found that when the S&P 500 falls at least 5% within a year, it typically rebounds quickly, delivering a median 6% return over the following three months. And in 84% of past instances, those rebounds ended in positive returns.
That data gives investors reason to be hopeful. If history repeats itself, the current dip could be a buying opportunity. The market has shown resilience time and time again, bouncing back from temporary shocks—even those triggered by political or economic turmoil.
Still, there’s no guarantee that the past will repeat itself. The U.S. economy is showing signs of weakness, and this pullback may not be as short-lived as others.
Consumer Weakness Hints at Bigger Economic Problems
Wall Street isn’t the only place feeling the pressure. Consumers are also tightening their belts.
- Consumer spending fell 0.2% in January, marking the biggest drop in four years.
- Consumer confidence dropped 7 percentage points in February, the worst month-over-month decline in more than three years.
Since consumer spending makes up about two-thirds of U.S. GDP, these trends are concerning. Early estimates suggest first-quarter GDP could shrink at an annual rate of 2.8%, the sharpest contraction since 2020. If that forecast holds, the economy could be in for a rough ride.
Inflation is another red flag. The Consumer Price Index (CPI) has climbed for four straight months, and tariffs will likely push prices even higher. Businesses often pass increased costs from import taxes directly to consumers, squeezing household budgets even more.
The Shadow of 2018’s Market Turmoil
This isn’t the first time tariffs have shaken up the market. Back in 2018, Trump’s trade policies triggered a nearly 20% slide in the S&P 500. That decline played out over three months, from September to December. But by May 2019, the index had fully recovered and hit a new high.
Will history repeat itself?
The difference this time is the scale of the tariffs. In 2018, the average tax on U.S. imports rose to 3%. The current round of tariffs, plus possible new ones on the EU, could push that figure to 13.8%, according to the Tax Foundation. That’s a major shift, and it raises the stakes for both businesses and investors.
What Investors Should Keep an Eye On
The market is volatile, but opportunities exist for those willing to be patient. Key factors to watch include:
- Further tariff announcements: Any new trade restrictions could fuel additional market turbulence.
- Economic data releases: Consumer spending, inflation, and GDP reports will give clues about whether the economy is heading for a deeper slowdown.
- Corporate earnings: Companies will reveal how tariffs are impacting profits, and whether they’re able to offset higher costs.
For now, the best strategy might be to stay cautious—but ready. History shows that markets tend to recover, but the path forward may not be smooth.
