US market sell off - what is a market correction?

Investors have become accustomed to strong US economic and stock market performance in recent years. However, increasing doubts have set in, to which has caused a significant sell off.

The S&P 500, the 500 biggest US-listed companies, is now down around 4.5% in 2025. The index has fallen nearly 9% from its peak in mid-February as it edges closer to market correction territory. The tech-heavy Nasdaq index, where much of the losses have occurred, is down roughly 9.5% year to date. This index is home to most of the companies in the “magnificent seven”, including Apple, Microsoft, Nvidia and Tesla.

In better news though, there is little sign of the turbulence spilling across the pond as the FTSE 100 index, which tracks the biggest companies listed in the UK, is still up around 4% year to date.

By definition, a market correction is when a stock or market index falls by more than 10% from its most recent peak. This happens when investments are sold on a mass scale and causes share prices to fall.

Market corrections come in different shapes and sizes, and for different reasons. But typically, they occur when investors become less optimistic about the market outlook due to influencing factors such as economic data, geopolitical events and market volatility.

Why are US stock markets falling?

Since his inauguration, President Trump has attempted to rapidly implement his policy agenda. Domestically and internationally, he has delivered numerous policy reversals, sending shock waves through the markets.

Investors are worried that tariff policy uncertainty will tip the economy into recession. These fears were heightened further this week as President Trump said in a TV interview this week that the world’s largest economy was in a “period of transition”.

Trump has announced tariffs on China, Canada, and Mexico, with exceptions for the energy and car industries. Further tariffs on the EU are likely, and a blanket reciprocal arrangement is in the works. It is still unclear whether tariffs will be a permanent feature of trade with the US or a negotiating tool. In any case, Trump’s unpredictable policy implementation style has increased volatility in markets.

It's likely that headwinds for US stocks will remain throughout 2025 while uncertainty around Trump’s new policy agendas continue. However, the US stock market still makes up a large part of global stock markets and a lot of the strong underlying fundamentals remain intact, so we don’t see any reason for investors to panic.

The recent events highlights how quickly things can change in financial markets, so here are five top tips on how to invest during a market correction.

How to invest during a market sell off

1. Don't panic

After a market crash, emotional reactions will mean that price falls will often be exaggerated. It’s part and parcel of investing and should be expected from time to time – indeed a well known City adage goes, “market rise up the stairs and go down the elevator”.

Gently rising markets tend not to make newspaper headlines, but precipitous falls do – and it all adds to the general sense of fear. In the long run, markets are driven by company earnings, so think rationally about your investments. During a market-sell off when share prices are volatile, buying or selling in haste can result in being on the wrong end of price swings.

2. Get some context

Although there might be more questions than answers at the time, a market sell-off can often help you think about the impact on individual companies or sectors. Are profits now under more pressure? What are the opportunities given the change in the landscape? What are the threats?

Also, try to get a sense where valuations are relative to history. Think about whether valuations compensate you for the risks. Following a large market fall an overly pessimistic scenario may already be reflected in prices - and there could be a bounce as greater certainty or assurance is provided.

3. Diversify your investments

During a market sell-off where large swathes of shares are being sold, it might seem intuitive to focus on one type of company or one sector. But piling investments into one area is likely to increase the risk of volatility in your portfolio. Investors typically build portfolios of various shares and other assets so that they are not overly reliant on any one investment or asset class performing well – this is known as diversification.

Holding a variety of investments from different areas around the world also can spread risk out, so you don’t have all your eggs in one basket. If you do decide to invest overseas, be sure to learn the extra risks such as currency exchange movements and charges.

4. Stick to the plan

Hopefully you already have a plan in terms of how much money you are investing, or seeking to invest, and which areas it is allocated to. Market volatility will test your resolve, and in some cases you might question your decisions. Perhaps a market sell-off has revealed you have too little diversification, or you are taking too much risk. In these instances you may wish to make changes.

However, if your plan is a sound one (a well-diversified portfolio with a decent amount of cash for emergencies), it often makes sense to do little or nothing.

5. Use market falls to your advantage

We all know we should be buying when asset prices are low and selling when they are high. However, this is hard to achieve and many people end up making emotionally-led decisions and doing the opposite. A large fall in the markets could be just the opportunity you have been waiting for to invest in an area you have had your eye on but felt was too expensive.

If it is still too much of a leap of faith consider averaging in - buying your shares or units in stages over time or by setting up a monthly investment amount. The latter takes away any consideration of timing the market, which can be a relief.

Market sell-offs when combined with other factors can lead to an economic recession. Be sure to check out the article below if you’d like to pick up more insight on this: How to invest during a recession