The NASDAQ and S&P 500 Have Suffered a Correction: Danger or Opportunity?

Yahoo

17-03-2025

US stock markets are in turmoil following Trump's barrage of tariffs.
The technology-heavy NASDAQ Composite Index suffered a correction two weeks ago as share prices tumbled over fears of escalating geopolitical tensions.
A correction is defined as a fall of 10% from the previous high, and the NASDAQ's record high was reached back in December last year.
Just last week, the bellwether S&P 500 Index joined the NASDAQ as the former also suffered a correction as Trump upped the ante on tariffs, sparking fears of a long-drawn trade war.
Should investors head for the exits? Or is this the perfect opportunity to load up on more shares?
News headlines love to feature dramatic headlines about market plunges amid a wave of worries and fears.
It may sound surprising, but corrections happen more often than you would expect.
According to wealth manager Ben Carlson, the NASDAQ historically undergoes a market correction once every two years.
As for the S&P 500, it suffered five corrections during the spectacular bull run from March 2009 (the end of the Global Financial Crisis) to February 2020 (the beginning of the COVID-19 pandemic).
In fact, the S&P 500's last correction was just less than two years ago in October 2023.
Bear markets, which are defined as a 20% plunge from the high, occur once every four years.
The last correction that led to a bear market was back in 2022 when the US Federal Reserve hiked interest rates at the fastest pace ever to combat inflation.
No one knows if the current correction will result in a bear market, because that's something that will only be known in hindsight.
Think about this – if corrections occur fairly frequently, why should they scare you into selling at the lows?
Phrased another way – corrections should be viewed as a healthy mechanism for the stock market to regain some sanity.
Rampant optimism can cause share prices to rise to unsustainably high levels with companies trading at nosebleed valuations that imply that nothing can go wrong.
Corrections, therefore, serve as a reality check to temper over-enthusiastic investors who may believe that 'no price is too high' to own a hot stock.
Remember that selling in panic also means that you will be locking in your losses.
As long as the businesses you are invested in continue to churn out rising revenue and profits, you should stay put and do nothing.
It may even make sense to buy selectively into stocks that you have been eyeing for some time but hesitated because you felt that they were too expensive.
A correction provides that golden opportunity for you to accumulate stocks that have been on your radar.
It's a classic case of patience paying off as the market provides you with attractive bargains.
Of course, you mustn't just buy any stock out there as many stocks may seem cheap after a correction.
Be selective and go for businesses in sectors that enjoy long-term tailwinds.
You should also select companies that possess catalysts that can enable them to grow their revenue and earnings for many years to come.
Some promising sectors include artificial intelligence (AI), cybersecurity, and electric vehicles.
Meta Platforms (NASDAQ: META) is an example of a trillion-dollar technology stock that is riding on the AI wave.
For 2024, the social media behemoth saw revenue climb 22% year on year to US$164.5 billion while net profit surged 59% year on year to US$62.4 billion.
CEO Mark Zuckerberg has committed to spend up to US$65 billion this year to power his AI objectives.
Then there's Crowdstrike (NASDAQ: CRWD).
The cybersecurity firm saw its revenue rise 29.4% year on year to US$3.95 billion for its fiscal 2025 (FY2025) ending 31 January 2025.
Crowdstrike also churned out a positive free cash flow of US$1.07 billion, 13.6% higher than a year ago.
The company believes that it has a massive opportunity to continue growing with a total addressable market of US$116 billion.
The above are just several examples of companies reporting robust financials along with plans to continue growing their businesses.
Corrections should be viewed as a golden opportunity to load up on stocks for the long term.
Investors, however, should ensure that they have adequate cash on hand to take advantage of any corrections that occur.
Because such events are unpredictable, it's always recommended that you keep spare cash for investments.
This is known as an opportunity fund, and it should be in excess of your emergency fund, which should comprise at least six to 12 months of your expenses.
Armed with an opportunity fund, you can then deploy cash into the companies you have been eyeing when a correction hits.
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Disclosure: Royston Yang owns shares of Meta Platforms.
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