The recent 10 per cent correction in US equities has investors questioning ‘is it time to buy’, or do the warning signs signal sitting on the sidelines?

After reaching all-time highs in February this year, the US S&P 500 has shed over $US5 trillion in market value, erasing all gains since the November election in the United States and triggering widespread reassessment of market positioning.

This correction—defined as a 10% decline from recent peaks—marks the first significant market pullback since late 2023. The tech-heavy Nasdaq led the decline, confirming its correction status last the week before the broader S&P 500 followed suit. Major companies including Tesla, Apple, and Microsoft have experienced substantial share price reductions, contributing to the market’s overall decline.

The selloff accelerated following President Trump’s announcements regarding tariff policies, which sparked concerns about potential economic impacts. Corporate America has already begun signalling caution, with Target projecting larger-than-anticipated decreases in annual sales and transportation companies like Delta Air Lines halving profit estimates.

Historical Patterns and Current Context

Market corrections occur with surprising regularity. Since 1950, the S&P 500 has typically experienced a 10 per cent peak-to-trough correction in approximately two-thirds of all years. Data shows the index has been in a drawdown of 10 per cent or worse about one-third of the time throughout its history.

The period from 2009 to 2021 represented an exceptional environment for dip-buying, with only 30 per cent of market pullbacks developing into corrections or worse. This “golden age” created a generation of investors conditioned to expect quick recoveries. However, since 2022, about 50 per cent of pullbacks have evolved into corrections, suggesting a potential shift in market dynamics.

Current market valuations add complexity to the dip-buying decision. Despite the recent pullback, the S&P 500 trades at 20.5 times projected earnings for the coming year—significantly above its long-term average P/E ratio of 15.8. These elevated valuations make US equities potentially vulnerable to further declines if economic growth slows more than anticipated.

Assessing Dip-Buying Conditions

Several metrics help evaluate whether current conditions favour dip-buying strategies. These include recession probability, market technical indicators, valuation metrics, yield curve positioning, and volatility measures. As of early March 2025, only three of seven key criteria tracked by market research firms indicated favourable conditions for aggressive dip buying.

The market’s technical picture has deteriorated, with the S&P 500 breaking below its 200-day moving average—a level often watched by institutional investors. Only 47 per cent of S&P 500 constituents remain above their 200-day levels, indicating weakening market breadth. The Cboe Volatility Index has spiked to its highest level since December, reflecting heightened investor anxiety.

The yield spread between junk-rated bonds and US Treasuries has widened to its largest gap since September 2024, signalling increasing concern about riskier corporate debt. These technical indicators suggest caution rather than immediate opportunity for many market participants.

Sector selection has gained importance during this correction. Companies leveraging artificial intelligence technologies have experienced different trajectories than traditional cyclical sectors. US small-cap equities, which have underperformed large-caps for several years, now trade at relative valuations that some market participants find compelling, though the Russell 2000 small-cap index has fallen nearly 19 per cent from its recent peak.

Institutional Positioning

Wall Street institutions have begun adjusting their outlooks in response to the market volatility. Goldman Sachs lowered its year-end 2025 target for the S&P 500 from 6,700 to 6,200. J.P. Morgan increased its estimate of recession risk to approximately 40 per cent, up from 30 per cent at the beginning of the year, and Yardeni Research cut its 2025 year-end S&P 500 target from 7,000 to 6,400.

These institutional revisions reflect growing uncertainty about economic conditions rather than outright bearishness. The market’s reaction to upcoming economic data releases and corporate earnings will likely determine whether this correction represents a temporary setback or the beginning of a more prolonged period of market weakness.

The current correction has unfolded with remarkable speed, taking just 15 trading days to reach the 10 per cent threshold. Historical data shows that the median time for markets to recover from corrections is approximately 116 days, though recovery periods have ranged from weeks to years depending on underlying economic conditions.

As markets continue to digest economic data and policy developments, investors face the perennial challenge of balancing risk management with opportunity recognition—a challenge made more difficult by the market’s rapid decline and the complex mix of economic signals currently at play.

Strategic Considerations for Different Investors

Time horizon plays a crucial role in determining appropriate responses to market corrections. For investors with multi-decade horizons, market corrections historically represent attractive entry points when viewed through the lens of 10+ year returns. The S&P 500 has experienced 56 corrections since 1929, with only 22 evolving into bear markets (characterised by a decline of 20 per cent or more).

Rather than viewing dip-buying as an all-or-nothing decision, many professional investors may maintain a portion of portfolio assets in bonds or cash equivalents as “dry powder” to deploy systematically when equities reach predetermined correction thresholds. This approach often provides liquidity for opportunistic purchases while maintaining overall market exposure.

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The information contained in this article is gathered from multiple sources believed to be reliable as at March 2025 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article.

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