The markets have experienced a lot of volatility over the past month due primarily to the war in Iran. At one point in late March, the S&P 500 (SNPINDEX: ^GSPC) closed about 9% below its all-time high. That doesn’t yet meet the generally accepted definition of a correction, but it sure feels like one to many.
Naturally, it raises the question of whether there are worse times ahead. History does offer some guidance on this front. While there are no guarantees, investors might like what they find.
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Corrections of 10% typically occur about once a year. U.S. stocks enter a 20%-plus bear market drop on average about every six years.
Corrections often occur during both good and bad economic conditions. Bear markets more typically occur only when there’s a recession, an earnings contraction, or another major event.
Strong earnings growth tends to insulate against steeper stock market declines.
S&P 500 earnings growth percentage is expected to be in the double digits over the next two years.
In the short term, stocks can move for many reasons. Over the long term, stock market performance is driven by earnings growth. If corporate earnings are growing steadily, it’s likely to limit the downside that might be experienced.
Let’s take a look at recent corrections in which stocks fell, but earnings continued to grow.
Year
S&P 500 EPS Growth
Market Event
1994
+39.8%
9% pullback in the first half of the year
1997
+2.6%
10% correction late in the year
1999
+27.7%
12% correction in the second half of the year
2004
+20.1%
8% pullback in mid-year
2011
+12.4%
19% correction; near-bear market
2018
+20.5%
20% correction in the fourth quarter
Data source: Multiple
History shows that positive earnings growth for the S&P 500 doesn’t necessarily preclude stocks from approaching a bear market. In the cases of 2011 and 2018, however, most of the losses were recovered in relatively short order.
2011: Bottom in October, new all-time high in February 2012.
2018: Bottom in December, new all-time high in April 2019.
If history is any guide, it teaches us this. When earnings are growing, corrections are possible, but generally contained. Even in deeper corrections, rebounds tend to come relatively quickly.
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