The Nasdaq Is Back in a Correction. History Says This Will Happen Next.

The Nasdaq Composite (NASDAQINDEX: ^IXIC) has been a key player in stock market gains and enthusiasm over the past two years. This tech-heavy index has charged ahead, delivering double-digit gains annually as it benefited from excitement about artificial intelligence (AI) and a lower-interest-rate environment ahead.

However, what goes up must eventually come down, and the Nasdaq did just that when President Donald Trump's announcement of tariff's stirred up uncertainty. Investors worried that the duties would weigh on corporate earnings and the general economy and, as a result, they avoided the stocks most sensitive to shifts in the economic environment. Earlier this month, the benchmark slipped into correction territory, falling more than 10% from its recent high in December.

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Now the question is: Will what comes down eventually go up? The Nasdaq briefly exited correction territory in recent days before falling back down on Wednesday. Below, I'll consider clues from history to see what may happen next.

Image source: Getty Images.

Concerns about Trump's tariffs

First, here's a quick summary of the elements that have driven the index's moves in recent times. As mentioned, concerns about the impact of Trump's tariffs set into motion the downward momentum. The main point of focus was the idea of higher prices, which could lift companies' operating costs and hurt the consumer's wallet. In both cases, that's bad news for corporate earnings.

On top of this, rising prices could put the kibosh on the Federal Reserve's plan to lower interest rates. All of this hurt investor sentiment and prompted investors to shift out of growth stocks.

Over the past few days, however, comments from Trump have boosted optimism among investors about what's ahead. The idea is that the president's tariffs won't be as damaging as the market initially thought.

When speaking about certain potential tariffs on pharmaceuticals or semiconductors, for example, Trump didn't offer any specific launch dates. Regarding tariffs, in general, he said he may "give a lot of countries breaks." These signs of flexibility have buoyed spirits and the market, in general, in recent days and helped the Nasdaq exit correction territory.

Five recent Nasdaq corrections

For clues about the stock market's next move, here's a look at history -- specifically, five recent Nasdaq corrections. The chart below shows the start date of each correction, as well as the Nasdaq's performance in the three months from that start date.

As you can see, the Nasdaq gained in 4 out of the 5 periods. It's also important to note that in each case, the benchmark emerged from its correction within a period of days or weeks.

Source: YCharts. Chart by author.

What this shows is that corrections generally don't lead to longer or deeper periods of declines. Since 1974, only six S&P 500 (SNPINDEX: ^GSPC) market corrections have transitioned into bear markets, according to Charles Schwab and Morningstar research. After recent corrections, stocks have quickly gone on to gain.

Of course, history isn't always right, and markets have been known to offer us surprises -- both positive and negative. But if the Nasdaq follows historical patterns, as it often does, gains could be just ahead.

Should you buy Nasdaq stocks?

Does this mean you should buy Nasdaq stocks now? Well, the great thing about investing is you really can buy stocks at any time. Whether the market is soaring or plummeting, it's a good idea to always be on the lookout for the same thing -- quality companies trading at reasonable prices. These opportunities exist during any market environment.

Today, though, many top stocks remain significantly down from their highs. In some instances, that's left them at bargain prices. For example, AI leader Nvidia trades for 25 times earnings estimates for the next 12 months, down from 50 times earlier this year. And cloud computing and e-commerce giant Amazon is trading for 32 times forward earnings estimates, down from more than 45 times late last year.

If history is right and the Nasdaq soars in the coming months, these solid stocks may lead the way. Even if the benchmark and these players don't take off immediately, don't worry. The best news of all is the Nasdaq always delivers over the long term. History has never been wrong about that.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.