Will the Stock Market Crash in 2025? The Economy Is Sounding an Alarm Seen in the Last 2 Recessions.

The S&P 500 (SNPINDEX: ^GSPC) fell into correction territory in March as investors processed the abrupt shift in U.S. trade policy under the Trump administration. The losses accelerated in April when the president unveiled an aggressive slate of reciprocal tariffs. At present, the benchmark index is 14% below its high.

A forecasting tool from the Federal Reserve Bank of Atlanta suggests the U.S. economy contracted at an annualized 2.2% in the first quarter of 2025, which ended in March. That figure will not be finalized for several months, but it would be the first contraction exceeding 2% since COVID-19 caused a recession in 2020.

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Historically, the S&P 500 has declined sharply under those conditions. Here's what investors should know.

Image source: Getty Images.

Historically, the S&P 500 has crashed when quarterly GDP contracts more than 2%

Gross domestic product (GDP) measures the size of an economy. It represents the sum of four data points: consumer spending, business spending, government spending, and net exports. The Federal Reserve Bank of Atlanta continuously feeds relevant economic data into its GDPNow model to provide a running estimate of quarterly GDP growth.

The forecasting model currently suggests that U.S. GDP dropped at an annualized 2.2% in the first quarter of 2025. GDP has contracted at an annualized pace exceeding 2% only during two periods over the last 20 years, as described below:

• 2008-2009: Annualized GDP fell 2.1% in Q3 2008, 8.5% in Q4 2008, and 4.5% in Q1 2009 as the financial crisis hammered the U.S. economy. Banks were often unable to lend money to businesses, and consumers saddled with mortgage debt spent less on goods and services. Those events led to the Great Recession, during which the S&P 500 fell 57%.
• 2020: Annualized GDP dropped 5.5% in Q1 2020 and 28.5% in Q2 2020 as COVID-19 spread rapidly around the world. The resultant business closures led to supply chain disruptions that pushed inflation to a four-decade high as the government pumped stimulus into the economy. Those events led to a brief recession, during which the S&P 500 fell 34%.

To summarize, whenever annualized GDP has contracted by more than 2% in the last 20 years, the U.S. economy has suffered a recession. And the S&P 500 declined by an average of 45% during those periods. In short, while the benchmark index has already slipped into a correction, history says the S&P 500 could fall more sharply in the coming months.

However, investors should remember that every correction is somewhat unique, and there are exceptions to every rule. So, it would be wrong to assume the stock market will definitely crash further than it already has.

S&P 500 corrections have historically been an excellent time to buy stocks

Over the last 30 years, the S&P 500 has suffered 15 market corrections, four of which became full bear markets. But the benchmark index has typically produced strong returns during the year following its first market close in correction territory, as shown in the chart below.

Chart by author. Data source: YCharts.

Since 1995, the S&P 500 has returned an average of 14% during the year following its first close in correction territory. We can apply that information to the current situation to make an education guess about what the future might hold.

The S&P 500 closed at 5,521 on March 13, down 10% from the record high it hit in February. That was its first close in correction territory during the current decline. The index will add 14% to reach 6,294 over the next year if its performance matches the historical average. That implies 19% upside from its current level of 5,283.

Of course, past performance is no guarantee of future results. That platitude is especially true in the present situation. The Trump administration has unveiled the most aggressive tariffs the U.S. has seen in more than a century, which means there is essentially zero historical data to inform forecasts.

However, Wall Street anticipates a rebound in 2025 despite the tariff turmoil. The average year-end S&P 500 target is 6,024 among 16 analysts, according to MarketWatch. That implies 14% upside from the current level of 5,283. Moreover, investors can take solace in knowing that the S&P 500 has eventually rebounded from every past drawdown. In that context, the current situation is a buying opportunity.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.