For more than two years, Wall Street had been in a virtually unstoppable bull market. The rise of artificial intelligence (AI), the resilience of the U.S. economy, and excitement surrounding stock splits in some of Wall Street’s most-influential businesses all played key roles in sending the Dow Jones Industrial Average (^DJI 7.87%), S&P 500 (^GSPC 9.52%), and Nasdaq Composite (^IXIC 12.16%) to new heights.

But the stock market wouldn’t be a “market” without the ability for equities to move in both directions.

The last seven weeks have not been smooth sailing for Wall Street or investors. Since the S&P reached its all-time closing high on Feb. 19, the ageless Dow, benchmark S&P 500, and growth-focused Nasdaq Composite have respectively fallen by 14.9%, 17.6%, and 22.2%, as of the closing bell on April 7.

Image source: Getty Images.

However, the decline in stocks really picked up to close out the previous week. On April 3 and April 4, the S&P 500 cumulatively lost 10.5% of its value, which marked the fifth biggest two-day decline in the index since 1950.

With investors’ emotions running high, many are looking to historical data points and correlative events for guidance. Though there’s no indicator that can guarantee short-term directional moves for the stock market, history is quite clear what happens next for stocks after two-day wash-out events.

Why is the stock market crashing?

Before digging into the historical data that’s likely to turn investors’ frowns upside down, let’s tackle how we got to where we are now. In other words, why did Wall Street plunge into a correction?

The obvious answer is that uncertainty caused by President Donald Trump’s tariff policy is to blame.

On April 2, the president unveiled his “Liberation Day” tariff policy, which entails a sweeping 10% global tariff, as well as select reciprocal tariffs on countries that have historically run unfavorable trade imbalances with the U.S.

Trump believes tariffs will generate revenue for America, protect U.S. jobs, and encourage domestic production. Additionally, the use of tariffs opens the door for the renegotiation of trade deals that currently may not be in America’s best interests.

Unfortunately, tariffs aren’t as cut-and-dried as President Trump makes them appear. A lack of differentiation between input and output tariffs, for instance, is a dangerous game to play with the U.S. economy. Output tariffs are an added tax placed on finished goods imported into the country. Meanwhile, an input tariff is a tax placed on a good used to complete a finished product domestically. Input tariffs run the risk of increasing the prevailing rate of inflation during a period of slower growth for the U.S. economy.

S&P 500 Shiller CAPE Ratio data by YCharts.

But the fifth largest two-day decline in stocks isn’t entirely due to Trump’s tariff policy. Some semblance of blame also lies with the stock market’s being historically pricey.

The S&P 500’s Shiller price-to-earnings (P/E) Ratio, which is also known as the cyclically adjusted P/E Ratio (CAPE Ratio), entered 2025 at the third-highest premium during a bull market when back-tested 154 years. It peaked at a multiple of 38.89 in December 2024, which compares to an average multiple of 17.23 since January 1871.

Looking back 154 years, there have only been a half-dozen occasions, including the present, where the S&P 500’s Shiller P/E surpassed 30 and held that level for at least two months. The former five occurrences all resulted in a loss of value of between 20% and 89% in one or more of Wall Street’s major stock indexes losing between 20% and 89%.

This is a roundabout way of saying that investors are unwilling to tolerate outsize stock valuations over an extended period.

Image source: Getty Images.

When the S&P 500 crashes, it’s a surefire buying opportunity, per history

With a better understanding of what’s driven the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to jaw-dropping losses recently, let’s allow history to take center stage.

According to data aggregated by Creative Planning’s Chief Market Strategist Charlie Bilello, the 10-biggest two-day percentage declines in the benchmark S&P 500 since 1950 have ranged from 9% to 24.6%. As noted, the 10.5% decline from April 3 to April 4 slotted in as the fifth largest drop.

But what’s far more important is the total return potential, including dividends, of the broad-based index following these sizable declines.

As you’ll note in the following post on social media platform X by Bilello, every single instance where the S&P 500 endured a decline of at least 9% over a two-day period eventually led to significant gains over the next year, three years, and five years.

The S&P 500 fell 10.5% over the last 2 trading days which was the 5th biggest 2-day decline since 1950.

What has happened in the past following the biggest 2-day declines?

Stocks were substantially higher over the next 1, 3, 5 years every time.https://t.co/l5IYmkeySJ pic.twitter.com/GrjMqj9VLo

— Charlie Bilello (@charliebilello) April 5, 2025

On average, the S&P 500 was up:

• 31.8% on a total return basis one year later.
• 50.2% on a total return basis three years later.
• 121.9% on a total return basis five years later.

To put this into context, the average annual return from 1957 through March 2023 for the S&P 500 was roughly 10.5%. Historic declines in the benchmark index have paved the way for truly outsize return potential.

Widening the lens a bit further demonstrates just how much of an ally time in the market can be for patient investors.

Every year, the analysts at Crestmont Research refresh a published data set that calculates the rolling 20-year total returns of the S&P 500 dating back to the start of the 20th century. This published data set examines 106 rolling 20-year periods (1900-1919, 1901-1920, 1902-1921, through 2005-2024).

What Crestmont discovered was that all 106 periods produced a positive annualized return. In easy-to-understand terms, if you had, hypothetically, purchased an S&P 500 tracking index anywhere between 1900 and 2005 and held your position for 20 years, you generated a profit 100% of the time. It didn’t matter if you held through a depression, recession, war(s), a pandemic, or various stock market crashes — patience paid off every single time.

Although the recent stock market crash has been scary, history strongly suggests it’s an open invitation for long-term investors to put their money to work.