MW Three catalysts have driven S&P 500 corrections since 1964. Here's what could spark one now.

By Barbara Kollmeyer

Piper Sandler's Michael Kantrowitz is 'somewhat optimistic' a correction can be avoided

A positive start is ahead after Nvidia appears to have delivered earnings just enough for Wall Street to advance even if the AI king left some investors wanting a bit more.

But we've also heard billionaire investor Paul Singer warn of how risky and complacent the stock market is, as others talk of vibes souring for stocks.

So far this year, the worst day for the S&P 500 has been Friday's soft-data driven 1.7% drop. Could it get worse? Our call of the day from Michael Kantrowitz, chief investment strategist and head of portfolio strategy at Piper Sandler, has one answer.

His team looked at every 10%-plus correction for the S&P 500 since 1964 - 27 in total - and the three biggest catalysts for those, in a podcast discussing that study.

And they found the biggest drops tend to come from a macro event. "So today's there's definitely reason to be on watch, and it's not necessarily because there are imminent risks to the market, but we do have a backdrop where investors are fairly bullish on both the economy and on the stock market. We've gone through two good years in the S&P 500 and there's a lot of optimism around the new administration and hope that maybe [Fed Chair Jerome] Powell will get in a few more rate cuts this year," Kantrowitz said.

Bearish talking points currently include concerns over a crowded market and some earnings disappointment, with risks "mainly centered around the new administration's policies and the risks that those may come with." Other risks include high valuations and tight credit spreads, he said.

Those are conditions, but again, a catalyst is still needed, he said.

The catalysts for previous pullbacks were sharply rising interest rates, which caused 14 pullbacks, rising unemployment that caused 8, with "a global exogenous shock" responsible for five. The last catalyst is a mix of many different things, such as the U.S. debt downgrade in 2011 - types of events that are much harder to predict. Still, the market bottomed following those five events once those issues were resolved, he said.

Looking at more recent history, Kantrowitz noted that every correction from the late 1990s until 2018 "were all growth-driven market corrections." The two since 2022 have been rates-driven selloffs, meaning stocks falling while interest rates rose and markets ultimately bottomed with the peak in interest rates, he said.

And while the chart of those 27 makes it look like a correction rolls around every two years or so, he says markets can stay expensive or concentrated until something changes. It's "very clear throughout history that all of these corrections are very much driven by... either recessions or interest rate spikes. Valuation is extremely inconsistent at looking at corrections in these 27. Sometimes the markets were dirt cheap, sometimes, like in 2000, they were really expensive."

As for a 10% pullback this year, he's largely optimistic about two of the potential three catalysts. "With today as a backdrop, if I was a betting man I'd say there's a higher probability than normal that something unexpected could happen that is not a function of high rates or a lot of people losing their job i.e., recession," he said.

The last 12 months have seen minor growth scares and much of the market volatility has come from interest rate and inflation concerns, something that he sees continuing. "The risks to markets are when investors get really concerned about interest rates and inflation and not a growth scare," he says.

The strategist said he's optimistic about avoiding a correction this year simply because the economy is too strong, and when the 10-year yield rises above 4.5% the market gets shook up, but the turbulence doesn't last very long.

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are firmer, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y also rising and gold (GC00) is under pressure.

   Key asset performance                                               Last       5d      1m      YTD     1y 
   S&P 500                                                             5956.06    -3.06%  -1.38%  1.27%   17.48% 
   Nasdaq Composite                                                    19,075.26  -4.89%  -2.84%  -1.22%  19.61% 
   10-year Treasury                                                    4.277      -23.40  -24.20  -29.90  2.00 
   Gold                                                                2908.5     -1.59%  1.99%   10.20%  41.68% 
   Oil                                                                 68.77      -5.25%  -6.12%  -4.31%  -12.17% 
   Data: MarketWatch. Treasury yields change expressed in basis point 

The buzz

Nvidia stock $(NVDA)$ bounced around but is up some after reporting strong earnings and profit, thanks to its Blackwell AI chips.

Salesforce shares $(CRM)$ are falling after a disappointing forecast, while Snowflake (SNOW) stock is climbing on upbeat revenue guidance.

EBay shares $(EBAY)$ are tumbling after guidance fell short, and Instacart $(CART)$ is also sinking after the grocery delivery app's profit disappointed.

HP, Dell $(DELL)$ and Autodesk $(ADSK)$ are coming after the close.

Weekly jobless claims, revised fourth-quarter GDP and durable-goods orders are all coming at 8:30 a.m., with pending home sales at 10 a.m.

Lots of Fed speakers are due to speak: Kansas City Fed Pres. Jeff Schmid. Vice Chair for Supervision Michael Barr, Fed Gov. Michelle Bowman, Cleveland Fed Pres. Beth Hammack and Philadelphia Fed Pres. Patrick Harker.

Oscar-winning actor Gene Hackman and his wife were found dead at their home in New Mexico.

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Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   SMCI    Super Micro Computer 
   PLTR    Palantir Technologies 
   GME     GameStop 
   NIO     NIO 
   TSM     Taiwan Semiconductor Manufacturing 
   AMZN    Amazon.com 
   AAPL    Apple 
   AMD     Advanced Micro Devices 

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February 27, 2025 06:48 ET (11:48 GMT)

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