In an atypical move for the market, the Nasdaq-100 index already finds itself in correction territory just 1.5 months into the new administration. Usually, optimism abounds during a president's first year in office. However, this is actually a second Donald Trump administration, so maybe that's the difference.
What's the one thing that isn't different? The President's penchant for tariffs. When combined with Elon Musk's DOGE team reducing government employment and the potential alienation of key trading partners and allies, investors have sold the market first while waiting to ask questions later.
But just how long will the downturn last? Does it look like the correction is nearing a bottom, or is there more pain ahead?
NASDAQINDEX: ^IXIC
Key Data Points
This Nasdaq correction has been abrupt
The reasons for the tech sector correction aren't just related to the Trump tariff threat. Even since last summer, there has been concern over the longevity of the AI boom. After two years of AI hypergrowth, some investors may be fearing a slowdown in AI spending if companies don't see a sufficient return on investment. And if the economy goes into a slowdown or even recession, returns on all that AI spending will be harder to come by.
Add in the emergence of China's DeepSeek AI model, which raised questions over the need for all this infrastructure spending, and AI-powered technology darlings have plummeted from recent lofty highs. As of the end of trading Monday, the Nasdaq-100 was down 12.6% from its recent all-time highs experienced just a few weeks ago in mid-February.
Is this the beginning of the end or the end of the beginning?
The good news is that, if recent history is any guide, the market might be nearing the end of this correction.
Over the past 10 years, there have only been three Nasdaq pullbacks worse than this one -- late 2018, the COVID-19 sell-off of 2020, and the inflation-driven sell-off of 2022.
QQQ Percent Off All-Time High data by YCharts.
The context was a bit different for each of these three sell-offs. In 2018, inflation was rising slightly, and the Federal Reserve was lifting rates off the zero-lower bound that had been the norm for much of the preceding decade since the great financial crisis of 2008. In addition, like today, President Trump was waging a trade war. The combination sent tech stocks into a tailspin.
2020 was, obviously, the beginning of the Covid pandemic. In retrospect, that proved to be a huge buying opportunity for the tech-heavy Nasdaq, as the Federal Reserve cut interest rates to zero, and the entire globe began to depend on digital communications and electronic gadgets more than ever.
However, 2022 saw the rubber band snapping back the other way. As the economy reopened, inflation took off amid the large fiscal stimulus and severe supply constraints caused by the pandemic. The result was the highest inflation in 40 years, followed by the fastest-ever interest rate hikes in history.
How today's sell-off is like and unlike these others
Although the circumstances of these past sell-offs were different, today's sell-off bears some similarities with the pullbacks in 2018 and 2022, especially 2018. As in 2018, President Trump is ushering in a new phase of the trade war with China, although the new wrinkle this time is that he's opening up a new front against our allies and neighbors -- Mexico and Canada.
While more duties on China may have been expected, it appears the Mexico and Canada tariffs are what's really roiling markets at the moment. The three economies are quite interlinked, so putting up 25% tariffs on a broad swathe of goods could be more disruptive than the trade tensions back in 2018.
At the same time, Elon Musk is laying off significant numbers of federal workers under the Department of Government Efficiency (DOGE), which is causing fears of a growth slowdown.
At first glance, that may not be such a big deal. There were only about 3 million workers in the federal government out of about 163 million total U.S. employed workers as of February of 2025. That's less than 2% of the total workforce. And obviously, not all federal workers will be laid off.
Still, it's possible that doing both tariffs and layoffs at once means private sector businesses may not be in a mood to absorb the newly unemployed federal workers into the workforce. That could lead to lower growth, less consumer spending, and reduced business confidence, which has the potential to feed on itself.
In addition, there could be general uneasiness over Trump's fraying of U.S. alliances across the globe. Geopolitical risks were already high, and the President's somewhat antagonistic behavior toward U.S. trading partners may be adding to the sense of dread.
Image source: Getty Images.
But there are reasons not to panic
Now that the market has corrected significantly, what are some of the ways this correction stabilizes and turns things around?
A big potential positive and key difference between 2018 and 2022 is the position of the Federal Reserve. In case of a weakening economy or higher unemployment, the Federal Reserve today has plenty of room to cut interest rates. In 2018, part of the market's fear was that the Federal Reserve was raising interest rates off zero for the first time in a decade, even as trade tensions threatened growth. And 2022 was obviously an interest rate shock.
In contrast, today the Fed is in the midst of a cutting cycle, with the federal funds rate having been lowered from roughly 5.33% at its high last year to 4.33% currently.
In addition, it doesn't yet appear that the artificial intelligence (AI) build-out is slowing down anytime soon. Recent earnings results from Nvidia, Broadcom, Marvell, and Oracle have all seen strong guidance in terms of orders, bookings, and the multiyear AI growth outlook over just the past few weeks.
While growth stocks have borne the brunt of this sell-off, lower interest rates could also help them find a bottom, even if the overall economy slows down.
Could this be a dot-com bubble bursting?
Skeptics could point out that I have only compared the current sell-off with the past 10 years and that today's AI build-out has parallels with the dot-com boom, which obviously didn't end well. In fact, after the dot-com bubble burst in 2000, the Nasdaq didn't regain its former highs until 2015!
The big question is, is the current pullback the start of something much worse, such as the crash of 2000 and the ensuing 15 years?
That seems like a stretch. In the dot-com boom, valuations were much, much higher than they are now, and the dot-com bubble had run for about seven years before bursting. In terms of AI, we are really just about two years into the boom, and the market leaders have generally had the bottom-line earnings growth to support their valuations. While one wouldn't necessarily call these stocks "cheap," their multiples aren't off-the-charts crazy, either.
Stick to your Foolish plan
It is very hard to time the market, which is inherently unpredictable in the short term. But as long as the economy doesn't dip into a dot-com-like bust or Great Recession, it seems like the market has already discounted a potential growth slowdown very quickly.
However, the policy actions of the administration are anything but predictable, and there seems to be just as strong a case for a strong bounce-back as there is for some further downside. The high uncertainty is why it's important to stick to your Foolish investing plan, with an eye on the long term and a diversified portfolio. However, if this investor had to choose to buy or sell today, I'd probably choose to buy.
