Are Stocks Due for a Correction?

Adam Turnquist | Chief Technical Strategist

Last Updated: January 23, 2025

After a slow start out of the gate, stocks are finally starting to make some technical progress this month. Call it a Trump bump or another buy-the-dip-inspired rebound, but the S&P 500 is trading less than 1% away from a record high, as of January 22. A close above 6,090.27 would check the box for a new high and end the 29-trading day dry spell without one, a relatively high count considering the index made a new high every 4.4 trading days in 2024.

There are plenty of catalysts underpinning the recent advance. President Trump brings a pro-growth agenda to Washington, along with expectations of reduced regulations and the prospect of lower taxes. Several major bank CEOs have recently highlighted the elevated enthusiasm for the new administration among their corporate clients. On last week’s earnings call, JPMorgan Chase’s CEO Jamie Dimon noted, “Businesses are more optimistic about the economy, and they are encouraged by expectations for a more pro-growth agenda and improved collaboration between government and business.”

Many of these major banks also reported fourth-quarter earnings that handily exceeded forecasts, adding another tailwind to the latest rebound. Outside of improving net interest margins and a jump in investment banking activity and trading revenue, there were also positive takeaways at the consumer level as credit and debit card sales notably picked up last quarter for several of the big banks.

At the macro level, a cooler-than-expected core Consumer Price Index (CPI) report last week helped assuage inflation fears and keep rate-cut expectations on the table. This translated into a sharp pullback in interest rates, including a notable 0.13% drop in 10-year Treasury yields. And while the pullback was encouraging, it was not enough to reverse the developing uptrend in yields. Technically, a move below support near 4.45% would be a good sign of the cycle high being reached earlier this month.

With the stock market nearing record-high levels, it might seem premature to talk about a potential correction — characterized by a market drawdown of 10% or more but less than 20%. However, bull markets are not linear, and corrections, though relatively improbable, are always possible. According to our friends at Ned Davis Research, a correction has occurred every 1.1 years going back to 1928. Furthermore, the last time the market entered an official correction was 309 trading days ago, spanning well beyond the average number of 173 trading days without a correction since 1928.

Corrections Are Probably More Common Than You Think

Source: LPL Research, Ned Davis Research 01/22/25
Analysis based on daily closing price of the S&P 500 from 01/03/1928 to 01/22/2025.
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

While a correction may be unexpected, drawdowns in the market are the norm. In fact, the S&P 500 has been in some form a drawdown 93% of the time since 1950 (in other words, 7% of all trading days have been at record highs). As highlighted below, drawdowns of less than 5% from a record high are the most common, occurring in roughly 37% of all trading days. Pullbacks that exceed 5% but not 10% occur about 15% of the time, while bear market drawdowns of at least 20% represent roughly 21% of all trading days.

S&P 500 Drawdown State (1950–YTD)

Source: LPL Research, Bloomberg 01/22/25
Analysis based on drawdowns from record highs on the S&P 500 since 1950.
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

President Trump’s pro-growth agenda, a reprieve from rising rates, and solid earnings thus far have recently renewed investor optimism. Momentum has turned bullish as the broader market approaches record-high territory. However, market breadth measures have not kept up with the recent rebound in stocks, implying the latest advance has been relatively narrow. While deviations between price and market breadth can persist for extended periods, they can often foreshadow building vulnerabilities of a rally susceptible to stalling. While we are not making a call for an imminent correction, investors should not be surprised if one develops this year as history shows they occur at least once per year.

LPL Research expects stocks to move modestly higher in 2025, while acknowledging reasonable upside and downside scenarios. Upside support could come from economic growth, a supportive Fed, strong corporate profits, and business-friendly policies from the Trump administration. The most likely downside scenarios involve re-accelerating inflation, higher interest rates, and geopolitical threats that do economic harm.

Important Disclosures

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.

This research material has been prepared by LPL Financial LLC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

For Public Use – Tracking: #686651

Article written by: Adam Turnquist

Adam Turnquist oversees the management and development of technical research at LPL Financial. His investment career spans over 15 years.