Since hitting an all-time high in early February, the S&P 500 (SNPINDEX: ^GSPC) is down about 6%. The sell-off has been driven by a number of factors. The conflict in the Middle East continues to escalate, inflation remains stubborn, and oil prices are soaring.
Is it time to buy the dip in the S&P 500, or is there more pain ahead? Let’s break down the case for each.
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Quite simply, the S&P 500 is one of the best tools for long-term wealth creation. If your time horizon is several years or more, a modest 6% pullback shouldn’t scare you. In fact, it could be viewed as a buying opportunity.
Over the past century, the S&P 500 has returned an average of 9% to 10% annually. Those returns have been generated through recessions, hyper-inflationary periods, wars, and multiple market crises. In every case, the U.S. stock market has been able to rebound and establish a new all-time high.
In the shorter term, the earnings picture for S&P 500 companies still looks positive. The index is currently on pace to deliver 12% earnings growth year over year. If achieved, it would be the 6th consecutive quarter of double-digit growth.
While the short-term can deliver a lot of noise, the fundamental backdrop still looks relatively solid.
The biggest wild card is the conflict in Iran. Much of the recent market volatility has been due to the uncertainty surrounding how long it will last and how severe the repercussions might be. Crude oil prices have shot higher. There’s a growing belief that the Fed might not be able to cut rates at all in 2026. And inflation remains a major threat to consumer affordability.
Valuations could also become problematic. The State Street SPDR S&P 500 ETF (NYSEMKT: SPY) trades at a forward price-to-earnings (P/E) ratio of 21. That’s down from its recent highs, but still elevated by historical standards. That’s a product of the high concentration in the tech sector, which could prove to be a vulnerability should stocks keep trending lower.
And let’s not ignore the current economic risks. The labor market has cooled off significantly. That’s often a strong signal of a weakening economy. GDP growth also slowed sharply in Q4 2025. Recession risk remains elevated. If you’re looking for the best ways to invest during a recession, Motley Fool has published this guide to help.
