Understanding the recent U.S. equity slump—and what to do about it

Since 2022’s difficult equity market, the S&P 500 has had an impressive momentum run, posting significant gains throughout 2023 and 2024. Investors have been optimistic about a recovering economy, strong corporate earnings, and AI innovation. However, on February 19th the S&P 500 entered a downturn, declining 10% from peak levels in only 16 trading days. Although U.S. equity markets appear to have stabilized, many investors are still rattled: could this happen again? Let’s take a look.    

First, it's important to understand why this underperformance might have happened. One of the main likely catalysts for the drawdown was tariff and trade uncertainty. The potential economic consequences surrounding Trump's tariff announcements sparked concern among investors and added fears that the U.S. could be heading into a new trade war. In turn, market volatility spiked, contributing to the broader market pullback.     

Another significant contributor was market concentration risk coming home to roost. Over the past several years, a handful of large-cap tech stocks have dominated the market's performance, driving much of the growth in 2023 and 2024. Those same companies and sectors that drove performance can also weigh the market down during periods of uncertainty and slowdown. Information technology, communication services, and consumer discretionary stocks account for 50% of the S&P 500's market capitalization, and all three present negative returns year to date.     

The strong bull-run of 2023 and 2024 has led to elevated valuations, with investors beginning to question whether stock prices have become overheated. Although concerns over stretched valuations alone may not be enough to warrant a drawdown, it combined with the other factors mentioned above to spur a market pullback.   

The recent S&P 500 drawdown ranks as the eighth worst one-month return since the 1950s. However, the pullback may be more of a market correction rather than a sign of a prolonged downturn. Strong corporate fundamentals and earnings growth are still expected in 2025. Short-term turmoil around trade uncertainty is sometimes needed to accomplish long-term goals. 

This drawdown is a reminder that market volatility is normal and market risks exist, but it isn’t necessarily a reason to drastically change long-term investment strategies. 

Julia Rozenfeld contributed to this article. All market performance data from Bloomberg.