Last week marked a sell-off not seen since the pandemic-induced market crash of 2020. In just two days (Thursday and Friday), the Nasdaq Composite (^IXIC +1.23%) fell 10.7%, the S&P 500 (^GSPC +1.02%) tumbled 9.9%, and the Dow Jones Industrial Average (^DJI +0.63%) slipped 8.8%.
The sell-off pushed the Dow into a correction, the S&P 500 went back into a correction, and the Nasdaq moved from a correction into a bear market. A correction is a decline of at least 10% from a recent high, while a bear market is a drop of at least 20%.
Here's what you need to know about the Nasdaq bear market, how to prepare for it, and how long it could last.
Image source: Getty Images.
Bear market frequency
No one knows how long this Nasdaq bear market will last, but we can look at historical data to get a feel for average bear market durations.
Over the last decade, the Nasdaq has experienced six corrections. Those corrections turned into bear markets four times -- during the late 2018-induced trade war sell-off during President Donald Trump's first term, the pandemic decline in 2020, the 2022 pullback, and the current bear market. The 2018 and 2020 sell-offs were very short-lived, but it took until early 2024 for the Nasdaq to reach a new high after the 2022 bear market.
The following chart shows the Nasdaq's performance over the last decade. You'll notice that the bear markets of late 2018 and early 2020 are V-shaped, while the 2022 bear market is a more pronounced U-shape.
Data by YCharts.
The S&P 500 has experienced 22 bear markets since 1928, but they last, on average, less than a quarter of the time of bull markets. The gains made during bull markets have more than made up for losses experienced during bear markets. In fact, buying quality stocks during bear markets has been one of the best ways to compound wealth over time.
Buying during bear markets
With bear markets, it's important not to try to time the bottom. Rather, being roughly right is more than enough to unlock potentially powerful gains.
The 2022 bear market is a great example. When the dust had settled, growth stocks like Netflix, Tesla, Meta Platforms, and Nvidia (NVDA +0.29%) had lost over half their value, and the Nasdaq lost a third of its value. And Apple, Microsoft, Alphabet, and Amazon were all down between 26.8% and 49.6%.
If you had bought shares in any of those companies, even halfway through the sell-off, you would have earned an exceptional return over the next few years. Meaning that if you had bought Netflix down 25% or Meta Platforms down 30% -- even though those stocks would go on to fall over 50% -- you still would have more than doubled your investment because of how much they soared in the following years.
The key takeaway: Investing in excellent companies at decent prices is always better than trying to buy shares in a mediocre business at a bargain-bin price.
Earnings estimates will come down
Each bear market is different. In 2020, the pandemic led to rapid declines in companies that depended on in-person services, travel, and such -- like hotels and restaurants. While companies that were able to sell goods online, like Target or Nike, experienced record-high stock prices.
The Nasdaq surged 84.5% between 2023 and 2024 as excitement for artificial intelligence (AI) and cloud computing fueled a rally in megacap growth stocks like Nvidia, Apple, and Microsoft -- which saw their market caps soar beyond $3 trillion each.
Valuations of many growth stocks became stretched as stock prices outpaced earnings growth. However, as long as earnings keep growing, valuations can be justified.
Nvidia is a perfect example. Its stock soared over 800% between the start of 2023 and the end of 2024. However because it grew earnings so rapidly, its valuation was reasonable based on analyst consensus estimates for the next 12 months of earnings.
However, tariffs throw a wrench into near-term expectations. Analyst earnings forecasts will likely come down for internationally exposed companies like Nvidia because trade with other countries will be more expensive. And because the chipmaker's top customers -- hyperscalers like Microsoft, Alphabet, and Amazon -- could pull back on spending.
In sum, this bear market results from valuation concerns clashing with serious economic risks. Improvements in these factors will likely be the catalyst that could lead to a bear market recovery.
NYSE: KO
Key Data Points
How to prepare
If tariffs last, the ripple effects could take a sledgehammer to near-term earnings expectations. So, it's best not to put too much hope into prior guidance.
In upcoming earnings reports, it won't be surprising if companies retract or suspend guidance, as many did during the pandemic, until they regain their footing and figure out what the new normal will look like. However, tariffs could also be temporary, and some sort of resolution could make this bear market short-lived.
Last week's rapid declines showcased investor fears and the harsh reality that no one knows how trade tensions will play out, the damage they could have on businesses and the labor market, and if the economy could fall into a recession.
At times like this, it's best to focus on what you can control. Conducting a portfolio review is one way to prepare for a prolonged bear market. Revisiting what you own and why you own it can be a great way to filter out the noise of stock market volatility and determine if an investment thesis is intact or threatened by economic conditions.
A company like Nvidia might see earnings decrease, but it is still a very profitable business with high margins and an exceptional balance sheet. Nothing has changed about the long-term potential of AI, either.
So, Nvidia would be a good example of a stock that could see its price face pressure, but the business is sound. Whereas a company that depends on debt to operate, has low margins, and a weak balance sheet is worse off.
Maintaining a long-term horizon and owning stocks that suit your interests and risk tolerance is also a good idea. Investors looking to supplement income in retirement may want to consider safe dividend-paying companies like Coca-Cola (KO 1.37%) and Procter & Gamble (PG 1.02%), which have paid and raised their dividends for over 60 consecutive years, have exceptional supply chains and distribution, and are in a good position to endure tariffs.
NYSE: PG
Key Data Points
Coke is up 12.3% year to date while P&G is down just 2.3%, a sign that both stocks are holding up well even in the face of market volatility.
The best resource for outlasting a bear market is time. If you have a multidecade investment horizon, all that really matters is a business's future growth, not its stock price today. Conversely, if you have a shorter time horizon or are nearing retirement, then risk management becomes paramount.
While no one likes losing money, we can take solace in knowing that bear markets have historically been exceptional buying opportunities and usually don't last long. Managing emotions and holding shares in quality companies can make it easier to outlast a bear market.
