Is a market correction coming?

U.S. equity markets opened 2026 setting record highs following a strong rebound from last year’s volatility. ¹ The S&P 500 narrowly avoided a bear market last April and before regaining momentum as company earnings and consumer demand proved more resilient than many expected. Rather than reacting to fear-driven narratives, investors increasingly focused on whether economic fundamentals could continue supporting growth.

Recent performance reflects a market adjusting expectations rather than retreating outright. Investors expressed concerns about returns from artificial intelligence (AI) investments, catalyzing volatility in narrow pockets of the market based on perceptions of the pressure AI may put on certain business models. At the same time, markets benefited from a shift away from the most disruptive policy outcomes, with investors largely looking past tariff headlines and government shutdown risks. Steadier signals such as solid consumer spending and corporate earnings growth helped support diversified portfolio returns year-to-date, even as unresolved policy and economic questions continue to influence daily market moves.

AI raises questions as market performance broadens

AI’s rapid advance is continuing to challenge both companies and investors, particularly as high starting valuations collide with uncertain timelines for returns. Markets have grown more volatile as investors respond quickly to new AI developments, often selling first when future profitability is unclear and capital spending is rising faster than visible returns. Heavy investment in infrastructure and computing power remains necessary but those investments may take quarters or years to translate into earnings, keeping pressure on sentiment in the near term.

AI is also disrupting established software business models by lowering barriers to entry and compressing pricing power. As switching costs decline and competition increases, investors are differentiating more sharply between companies with durable advantages and those benefiting mainly from broad AI enthusiasm. This environment has made markets quicker to reward clear execution and just as quick to penalize disappointment.

Despite these challenges, AI-related leadership remains an important driver of market performance. Information technology and communication services stocks continue to represent large portions of the S&P 500. ¹ Five major companies – Amazon, Microsoft, Alphabet, Meta and Oracle – expect to increase AI infrastructure and data center investment by 70% in 2026 compared with 2025. While elevated valuations can increase sensitivity to setbacks, ongoing AI adoption continues to support long-term growth expectations.

Policy support helps broaden market leadership

To start 2026, the market’s overall tone appears healthier as performance extends beyond a single theme. Eight out of 11 S&P 500 sectors reached new all-time highs, signaling broader participation than in prior rallies dominated by a handful of companies. ¹ Improved U.S. mid-cap, small-cap and international stock performance alongside better economic data and renewed expectations for lower borrowing costs has reinforced the idea that market strength is becoming more evenly distributed. ¹

Policy developments have supported these improving expectations. The “One Big Beautiful Bill Act's” (OBBBA’s) business stimulus measures helped lift earnings expectations, encouraging investors to look beyond mega-cap technology. When more areas of the market participate, overall performance tends to rely less on any single narrative to keep moving higher.

Consumers will also play a role in the months ahead. Some households will face lower tax bills this spring as changes from the OBBBA take effect, which could help sustain consumer spending. Together, these factors have added another layer of support beneath market confidence, even as investors remain alert to evolving risks.

Tariffs remain a headline risk

Tariffs and policy shifts continue to shape investor sentiment, even if their immediate impact has faded from headlines. Escalating tariffs drove much of the February-to-April 2025 market decline, while subsequent policy adjustments helped set the stage for the recovery. Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, explains the shift this way, “Stable consumer spending and improving corporate earnings have enabled investors to look past tariff impacts while investors continue to debate the durability of artificial intelligence (AI) spending and the pace of Federal Reserve interest rate cuts.”

Looking ahead, the next tariff chapter depends less on broad statements and more on details, such as negotiations, implementation timelines and legal decisions. The U.S. negotiated multiple arrangements, including 15% tariff rates with the European Union, Japan and South Korea, and secured a one-year deal with China. The administration also announced additional sector-focused tariffs, though it delayed implementation for certain products until 2027.

Legal uncertainty keeps tariffs in the background risk mix. Investors expect an early-2026 Supreme Court decision on President Donald Trump’s use of the International Emergency Economic Powers Act to impose tariffs. In the meantime, the cost remains visible: average tariff rates sit near 12% on imported goods versus roughly 2% at the start of 2025, and the Yale Budget Lab estimates an effective rate near 14.3% after consumer adjustments. ²

Understanding the impact of inflation and Fed policy

Inflation remains a key variable shaping both interest rates and equity valuations. Many economists expected tariffs to push inflation higher, yet Consumer Price Index (CPI) changes stayed modest in 2025 and slowed to open 2026. Tom Hainlin, national investment strategist, U.S. Bank Asset Management Group, notes the nuance: “We saw decelerating core price growth, but investors should expect still elevated inflation in coming months,” especially as companies decide whether to absorb or pass through higher costs.

Recent inflation data underscores why markets continue to debate “soft landing” versus renewed price pressure. Core CPI (excluding food and energy prices) rose 2.5% year over year in January, down from August’s 3.1% pace but still above the Federal Reserve’s 2% target. ³ Federal Reserve (Fed) surveys across regional districts also point to tariff-related cost increases in manufacturing and retail, raising questions of how much price pressure ultimately reaches consumers. ⁴

Fed policy remains central to market expectations because rate policy shapes financing conditions and investor sentiment. The Fed cut the federal funds target rate by 1% in late 2024 and by another 0.75% over the three meetings that concluded 2025, bringing the target range to 3.50% to 3.75%. While the median Fed projection anticipates one additional 0.25% cut in 2026, investors expect two or three, highlighting how market pricing can diverge from official guidance. ⁵

How to position your portfolio for uncertainty

Politics has also intersected with monetary policy in ways markets watch closely. President Donald Trump has publicly expressed frustration with the pace of rate cuts and recently nominated Kevin Warsh as the next Fed Chair, pending Senate confirmation. Warsh’s prior experience on the Fed’s Board of Governors has led many to view him as a pragmatic choice, though leadership transitions add another variable to an already complex policy environment.

In this setting, many investors focus less on predicting the next market downturn and more on maintaining resilience through different market conditions. The core message remains consistent –  stay invested and diversified despite volatility, as significant market swings are not new. For those who held excess cash and missed part of the rally, Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group, emphasizes the value of using a dollar-cost averaging approach over time. “New all-time stock market highs are often followed by more all-time highs,” he points out. Dollar cost averaging is an investment strategy in which you purchase investments on a regular schedule, regardless of market conditions. This approach minimizes the impact of market volatility on your portfolio.

This environment also highlights the importance of reviewing personal strategies. Now is an important time to check in with a wealth planning professional to ensure you are comfortable with your current investments and that your portfolio aligns with your time horizon, risk appetite and long-term financial goals.

Understanding market corrections

What is a market correction?

A market correction usually means prices fall at least 10% from a recent high, with a 20% decline or more often referred to as a bear market. Corrections can apply to broad market indexes like the S&P 500 or individual securities and can unfold quickly or over days, weeks or months. While concerning to investors, corrections are a normal part of market cycles because markets do not move in a straight line, and price “resets” often occur after strong gains or shifting expectations.

How big is a typical market correction?

Intra-year S&P 500 index declines have ranged from 3% to 48% with an average of 14% since 1990. That range and average helps distinguish corrections and bear markets from routine market volatility, such as smaller pullbacks that may not reflect a broader reassessment of growth, inflation or earnings. The average annual S&P return over that same time period is 12%, showing that meaningful drawdowns can occur even in years that ultimately finish higher.

How long do market corrections usually last?

Market corrections can last days, weeks or months, and timelines vary because different catalysts unwind at different speeds. The average correction (10%-20% decline) lasts 17 days but any single episode can be shorter—or longer—depending on whether the decline reflects temporary sentiment shifts or deeper economic stress. Recoveries also vary because markets often “price in” new information before it appears in lagging economic data, and investor confidence can return gradually as uncertainty clears.

How often do market corrections happen?

Corrections occur often enough that long-term investors generally treat them as part of the market’s regular rhythm rather than as rare events. The S&P 500 has spent 29% of time since 1927 trading 10% or more below a recent high, reinforcing that double-digit pullbacks are not unusual.

How investors approach market corrections

Many investors start by separating time horizons: short-term moves can feel dramatic, while long-term plans often assume periodic drawdowns along the way. Diversification matters because different assets and sectors can respond differently to growth, inflation and interest-rate shifts, which can help reduce reliance on any single market outcome. A common discipline during volatile stretches involves sticking with an investment plan aligned to goals and risk tolerance, and for those adding money over time, dollar-cost averaging can help reduce the pressure to “time” entries perfectly.

FAQs

Can market corrections happen even when the economy is strong?

Yes, stock market corrections can occur even when the economy is strong. Market corrections are often driven by investor sentiment, valuations, or external factors, such as geopolitical conflict or government policies, and do not always reflect the underlying health of the economy. As a result, strong economic indicators do not ensure immunity from market downturns.

How do interest rate changes affect market corrections?

Changing interest rates can influence market corrections by affecting borrowing costs and investor sentiment. When interest rates rise, it typically becomes more expensive to borrow money, which can slow economic activity and lead to declines in stock prices as investors adjust their expectations. Conversely, lower interest rates may stimulate investment and spending, sometimes delaying or softening market corrections.

What typically signals a market pullback or correction?

Typical warning signs leading to a pullback in the stock market include overvalued stock prices, rising interest rates, and increasing economic uncertainty. Additional indicators may be declining corporate earnings, excessive investor optimism, or geopolitical instability.

The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Diversification and asset allocation do not guarantee returns or protect against losses.