Wall Street’s most-trying times often bring about outsized returns.
For the better part of the last century, the stock market has been a wealth-generating machine. Though other asset classes have been successful in increasing the nominal wealth of investors, such as gold, Treasury bonds, and real estate, nothing has come close to the annualized returns generated by stocks.
But while this wide-lens view of the stock market paints a masterpiece, narrowing the timeline exposes the proverbial speed bumps and potholes investors regularly encounter.
Since the broad-based S&P 500 (^GSPC 0.06%) peaked in mid-February, all three major U.S. stock indexes have declined by a double-digit percentage. Both the mature stock-driven Dow Jones Industrial Average (^DJI 0.28%) and S&P 500 have firmly dipped into correction territory. Meanwhile, the growth-powered Nasdaq Composite (^IXIC -0.10%) officially fell into a bear market, as of April 8.
Image source: Getty Images.
What’s made these moves so eyebrow-raising has been their velocity. In April, the Dow Jones, S&P 500, and Nasdaq Composite all respectively recorded their largest single-session point gains in their storied histories, as well as registered some of their steepest single-day point and/or percentage declines. For instance, the S&P 500’s 10.5% two-day decline on April 3 and April 4 was its fifth-worst two-day drop dating back to 1950.
Heightened volatility has a tendency to incite fear and uncertainty on Wall Street. Then again, the stock market’s darkest days often bring about some of its most-impressive returns.
Last week, a fairly rare correlative event occurred for the stock market that’s been witnessed only 29 times since the start of 1950 — and this event has a nearly perfect track record of predicting what comes next for the benchmark S&P 500.
Stock market volatility has been historic in April
With Wall Street logging or nearing numerous records in April, in terms of outsized volatility, it’s important to recognize that the catalysts whipsawing the stock market are unlikely to disappear overnight.
The driving force behind Wall Street’s massive point and percentage swings has been President Donald Trump’s tariff policy. On April 2, Trump unveiled a 10% global tariff, as well as a list of higher “reciprocal tariffs” on a few dozen countries that have historically run trade deficits with America. It should be noted that these reciprocal tariffs (except those direct at China) were placed on a 90-day pause, per Trump, on April 9, which is what incited the largest single-day point gains on record for all three stock indexes.
It’s been a wild ride for Wall Street’s major stock indexes since the president’s April 2 tariff announcements. ^DJI data by YCharts.
The worry with tariffs is that their real-world impact doesn’t always match up with how things are expected to work out on paper. For example, input tariffs, which are duties placed on goods used to complete finished products in the U.S., run the risk of increasing prices on goods domestically, which can hurt margins and/or reduce hiring.
There’s also been an inconsistent message presented by Donald Trump and his administration. Wall Street feeds on being able to transparently look to the future. Since taking office, Trump has repeatedly changed his tune on which products would be subjected to tariffs, when tariffs would go into effect, and what the tariff rate(s) would be.
Complicating matters is the fact that stocks entered 2025 at one of their priciest valuations in history. 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), almost reached 39 in December, which is well over double the average reading of 17.23, when back-tested 154 years.
Though the Shiller P/E Ratio isn’t a timing tool, it does have a flawless track record of foreshadowing downside in one or more of Wall Street’s major stock indexes. Over the last century, the five prior instances of a reading north of 30 during a continuous bull market were eventually followed by declines of at least 20% in the Dow, S&P 500, and/or Nasdaq Composite.
Image source: Getty Images.
A highly correlative stock market event bodes positively for investors
With a clearer understanding of what’s causing some of the wildest daily stock market vacillations we’ve witnessed in decades, let’s turn back to the unique event that occurred last week, which should have long-term investors brimming with excitement.
Normally, up days on Wall Street don’t generate a lot of buzz. But when there are three sizable up days in a row, as we witnessed on April 22, April 23, and April 24, the market breadth bells start sounding.
“Market breadth” is a term used to describe the ratio of advancing stocks relative to the total number of advancing and declining stocks traded on a specific exchange. A low percentage points to fear and uncertainty, while a higher percentage indicates broad-based optimism.
Last week, more than 70% of the public companies listed on the New York Stock Exchange (NYSE) advanced on April 22, April 23, and April 24. It marked only the 29th time in 75 years that we’ve witnessed greater than 70% advancers on the NYSE for at least three consecutive days.
But what’s intriguing is examining how the broad-based S&P 500 has performed in the wake of these periods of heighted optimism.
More than 70% advancers on the NYSE for 3 days in a row. Hasn’t hit 4 since April 2020.
Strong returns across the board after this type of buying thrust. Higher a year later 27 out of 28 times for example.
Yet another rare and potentially bullish trigger from this week. pic.twitter.com/JQVntVGyht
— Ryan Detrick, CMT (@RyanDetrick) April 25, 2025
As you can see in the post above from Carson Group’s Chief Market Strategist Ryan Detrick on X, which also relied on data from Ned Davis Research, the S&P 500 was higher 26 out of 27 times (96.3%) one year later following these three-day stretches of extra-optimistic NYSE market breadth.
What’s also interesting is the magnitude of gains generated in the 12 months following strong market breadth. The 27 measurable events after one year resulted in an average gain of 18.9%. For context, this is more than double the average annual return for the S&P 500 of 9.2% from 1950 through the present.
Although nothing can be guaranteed as a certainty on Wall Street, these periods of exceptionally strong market breadth tend to be concentrated around stock market corrections, bear markets, and short-lived crashes. What this data from Detrick and Ned Davis Research shows is that, more often than not, outsized optimism marks a bottom in the major stock indexes and represents an excellent time to put your money to work.
While it’s likely we’re going to witness ongoing near-term volatility in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite as Trump refines his tariff policy and negotiates numerous trade deals, the wide-lens view of all three indexes conclusively points to eventual upside.