Market corrections: what are they?

What are market cycles?

Market cycles describe how economies and markets move through repeating phases. 

These phases are growth and peak when the market is doing well. Then a slowdown when things take a dip. Finally, there’s recovery, where the market starts to regain some of the growth it lost.

These shifts between different phases can be caused by changes to a number of factors, such as:

• Economic growth

• Interest rates and monetary policy

• Business investment

• Tech innovation

• Geopolitical events and shocks

• Consumer spending.

And, although these cycles are inevitable, their length and intensity differ every time. Some may have a sharp slowdown but quickly recover. Others may slow gradually but take quite some time to recover. 

But, historically, even a severe downturn will tend to turn back into an upward trend over time.

What is a market correction?

Within a market cycle, you can also have what’s called a market correction. A correction is a significant but temporary market decline, usually 10% or more. This might be because:

• The market has risen too quickly and needs to reset to something more realistic

• There’s been a change in economic conditions, businesses’ earnings outlooks, or government policy

• Investors are feeling more cautious.

The sudden drop of a correction may feel anxiety-inducing, but they’re common. And, thankfully, they’re also short-lived compared to market downturns.

A fairly recent example of this is the market correction that happened in March 2025. Major U.S. stock indexes fell over 10% in just a few weeks. By late June, the S&P 500 had recovered and reached new highs.¹

Why corrections can be healthy

Although uncomfortable, corrections can serve a useful purpose. 

Generally, they restore balance, promote long-term stability, and may even prevent a bigger market downturn.

This is for two main reasons:

1. Corrections bring valuations down to more realistic levels. Investors may overestimate the value of a certain company or sector. That can artificially push the prices of stocks and shares higher than they should be. If everyone realises this all at once, and pulls all their money out, it can trigger a sharp fall. This is what happened in the 90s dotcom bubble.

2. Corrections reduce excess speculation. When investors take on lots of risk chasing short-term profits, it can create bubbles. Corrections help cool this behaviour.

What should you do if there’s a market correction?

One of the best ways to deal with future market corrections is to arm yourself with information and set appropriate expectations. 

Knowing that market declines are common and often short-lived can help you feel more comfortable. You’re also more likely to focus on your long-term goals, rather than reacting to short-term events.

There are more practical ways to manage the impact of corrections too. Diversification spreads risk and means that even if one part of the market is going through a correction, another may make up for it. 

Longer investment timelines may also help. Long-term investors who stay invested during a market correction typically experience market recoveries as the market adjusts and returns to its upward trend.

The bottom line

Markets are cyclical, going up and down, even as they rise over the long term. This means that, even if there is a market correction or short-term dip, this will eventually resolve itself. 

Understanding cycles and corrections doesn’t remove uncertainty. But it can make market ups and downs easier to navigate with confidence, so you can find your investing comfort zone.

 

1. https://www.investopedia.com/stocks-near-first-correction-since-2023-11696484 - accessed 24 February 2026.

 

 

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