Current S&P 500 Decline: Trade Tensions Impacting Markets

The S&P 500 index (SNPINDEX: ^GSPC) comprises 500 companies across 11 sectors, making it the most diversified major U.S. stock market index. Currently, it is down 12.5% from its recent peak, indicating a market correction largely driven by escalating global trade tensions that began with President Trump’s announcement on April 2.

During this announcement, Trump introduced a sweeping 10% tariff on all imported goods from America’s trading partners. This included significantly higher “reciprocal tariffs” on goods from nations with substantial trade surpluses with the U.S. While the reciprocal tariffs are on hold for 90 days, pending negotiations (with the exception of those on Chinese imports), concerns about a possible economic slowdown have led to a sell-off in the stock market.

Long-Term Recovery Trends in Market Corrections

This is not the first instance where President Trump has adopted such policies. Historical trends suggest that the stock market typically recovers over time. The Vanguard S&P 500 ETF (NYSEMKT: VOO) is designed to directly mirror the performance of the S&P 500. Here’s why some investors might look to buy this fund during the ongoing dip.

Image source: Getty Images.

Understanding the S&P 500’s Composition

To be included in the S&P 500, companies must fulfill strict criteria, including a positive earnings sum over the last four quarters and a minimum market capitalization of $20.5 billion. However, fulfilling these criteria doesn’t guarantee inclusion as a special committee reviews the index quarterly.

Notably, while all 11 economic sectors are represented in the index, the information technology sector alone contributes 29.3% of its total value. This sector includes the three largest companies globally: Apple, Microsoft, and Nvidia, which together hold a market capitalization of $8.3 trillion. As they vie for leadership in various areas of the artificial intelligence (AI) landscape, they are expected to generate significant future value for investors.

The financial sector ranks as the second-biggest component, capturing 14.7% of the index. Key players such as JPMorgan Chase and Goldman Sachs, along with Berkshire Hathaway, which is overseen by renowned investor Warren Buffett, are included here. The healthcare sector follows at 10.9%, with consumer discretionary at 10.2%, featuring major firms like McDonald’s, Home Depot, Amazon, and Tesla.

Competitive options for S&P 500 ETFs exist beyond Vanguard. For instance, investors can also consider State Street’s SPDR S&P 500 ETF Trust, which mimics the same holdings. However, the Vanguard ETF stands out due to its low expense ratio of just 0.03%, significantly below the industry average of 0.75%. This difference means a $10,000 investment incurs just $3 in fees annually instead of $75 typically charged by competitors, allowing investors to retain more of their earnings over time.

Long-Term Performance of the S&P 500

Despite the current 12.5% decline from its peak, historical patterns indicate that market corrections are standard in investing. Capital Group reports that drops of 10% or more happen on average every two and a half years, which is part of the risk-reward equation of pursuing higher long-term returns as opposed to holding cash or risk-free assets.

Since its inception in 1957, the S&P 500 has yielded a compound annual return of 10.3%, even accounting for all past market fluctuations. The following table illustrates potential growth from an initial $10,000 investment in the index versus holding cash:

Calculations by author.

Past corrections in the S&P 500 stemmed from various economic challenges, including the dot-com crash in the early 2000s, the Global Financial Crisis of 2008, and the COVID-19 pandemic in 2020.

In 2018, a series of tariffs imposed by President Trump on U.S. trading partners affected approximately 12.6% of total imports, fuelling fears of a trade war and resulting in an almost 19.8% decline in the S&P 500. Investors reflecting on that time may find similarities today.

However, as negotiations with trading partners eventually led to better agreements, the S&P 500 rebounded strongly in 2019, surging by 31.5%. With the current administration seeking trade agreements with Japan, Europe, and China, a similar recovery may not be far off.

Consequently, the Vanguard S&P 500 ETF could represent a sound investment opportunity during this correction, particularly for those with a long-term horizon.

Evaluating an Investment in the Vanguard S&P 500 ETF

Prior to purchasing stock in the Vanguard S&P 500 ETF, consider this:

The Motley Fool Stock Advisor analyst team has unveiled what they view as the 10 best stocks to buy right now, none of which include the Vanguard S&P 500 ETF. The selected stocks may offer significant potential returns in the foreseeable future.

For example, consider the case of Netflix, which made this list in December 2004. A $1,000 investment at that time would now be worth $591,533!

Likewise, if you had invested $1,000 in Nvidia after it was recommended on April 15, 2005, today’s value would be $652,319.

It’s essential to mention that Stock Advisor has achieved an average total return of 859% — significantly surpassing the S&P 500’s return of 158%.

See the 10 stocks »

*Stock Advisor returns as of April 21, 2025

JPMorgan Chase is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, Goldman Sachs Group, Home Depot, JPMorgan Chase, Microsoft, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.