The S&P 500 has delivered a compound annual return of 10.5% since it was established in 1957. However, the index is coming off back-to-back annual gains of more than 25% in 2023 and 2024, which is something it has only achieved one other time in its history (during the dot-com tech boom in 1997 and 1998).

Many Wall Street analysts entered 2025 predicting another above-average return, citing business-friendly policies from the new Trump administration and a continuation of the artificial intelligence (AI) boom. But the reality has been very different so far -- the S&P 500 has plunged by 17% from its recent record high, as President Trump laid out plans to impose sweeping tariffs on America's trading partners last week.

The tariffs could deal a blow to global economic growth, forcing Wall Street analysts to slash their 2025 price targets for the S&P 500. But no matter the trigger, stock market corrections are a normal part of investing, and history lays out a very clear playbook for dealing with them. Here's what investors should do.

Top analysts are increasingly pessimistic about 2025

The S&P 500 is made up of 500 companies from 11 different sectors of the economy. It's the most diversified of the major U.S. stock market indexes, which is why many investors and fund managers use it as a benchmark for their own performance.

The S&P 500 ended 2024 at a price of 5,881. According to MarketWatch, a collection of top Wall Street analysts entered 2025 with an average price target of 6,667, implying a gain of 13.3%. But at the higher end of the spectrum were analysts like Ed Yardeni from Yardeni Research, who initially thought the S&P would climb by 19% to reach 7,000 this year.

Yardeni is often considered one of the most bullish voices on Wall Street, so it was a surprise when he lowered his 2025 target to 6,400 back in March. But he lowered it again after President Trump announced the tariffs last week -- this time to just 6,000. He isn't alone:

• Goldman Sachs cut its 2025 target for the S&P 500 from 6,500 to 6,200, and then again to 5,700.
• Barclays cut its target from 6,600 to 5,900.
• UBS lowered its target from 6,400 to 5,800.
• RBC Capital Markets slashed its target from 6,600 to 5,500.

Almost all of those downward revisions -- except the ones from Yardeni and Barclays -- now imply the S&P 500 will end 2025 with a year-over-year loss.

We've been here before

As mentioned, the S&P 500 is currently down 17% from its recent all-time high. According to Capital Group, declines of this magnitude tend to happen once every five years, on average, so we're running a little ahead of schedule, considering the last one was in 2022.

Nevertheless, anybody who invests for the long term will encounter stock market corrections. They are the price we pay for an opportunity to earn significant compounding returns over time. In fact, investors have faced four bear markets (declines of 20% or more) since 2001 alone, triggered by:

• The bursting of the dot-com internet bubble in 2001
• The Global Financial Crisis in 2008
• The COVID-19 pandemic in 2020
• The inflation surge in 2022

But that's not all, because the S&P 500 also endured a peak-to-trough plunge of 19.8% during 2018. One of the main reasons? Tariffs! That's right -- this isn't the first time President Trump has pulled this policy lever. During 2018, he imposed five sets of tariffs on America's trading partners, which covered 12.6% of the country's total imports. Among them were tariffs on steel and aluminum imports from every country in the world.

President Trump's objective is to encourage companies to manufacture their products in America. But even if this strategy does work over the long term, a broad rise in the price of everyday goods can decrease consumers' spending power, thus altering their behavior. As a result, tariffs can cause significant economic harm and dent corporate profits in the short-to-medium term, which is why the stock market tends to dislike them.

Image source: Getty Images.

What investors should do, according to history

Many of America's trading partners were able to either delay the 2018 tariffs, gain an exemption from them, or negotiate fairer deals. However, the Trump administration continued to roll out plans to impose new tariffs throughout 2019. Nevertheless, the S&P 500 actually soared by 31.5% that year.

To be clear, the slate of tariffs President Trump revealed last week are much broader and far more severe than anything he imposed during his first term in office. He placed a sweeping 10% duty on every imported good from every country, and he also introduced additional "reciprocal" tariffs on specific countries, which included a 20% levy on products imported from Europe, and a 34% penalty on goods imported from China.

But there are two things to consider. First, the reciprocal tariffs on America's largest trading partners -- which are Wall Street's biggest concern -- could come down as each country negotiates a new trade deal that levels the playing field, as was the case in 2018 and 2019. After all, a slowing economy doesn't benefit America or its allies.

Second, the S&P 500 has already come down 17%, which is a sizable adjustment. Could it fall further in the short term? Sure, but successful investing isn't about picking the top and bottom of the market -- as the old saying goes, "Time in the market is better than timing the market." The S&P 500 recovered to new highs after every single setback throughout history, including the unsettling crises and bear markets I highlighted.

As a result, when investors look back on this moment in a few years' time, they will probably wish they had used it as a buying opportunity. For those who remain fully invested, it might be best to ride out the storm and avoid panic selling. And those sitting on spare cash might find it a good time to scoop up some of America's highest-quality stocks at a discount.