The past three weeks have been nothing short of brutal for financial markets. Since reaching its peak on February 19, the S&P 500 has plunged 8.6%. Bond investors haven’t fared much better, with the 10-year yield dropping 40 basis points over the same period. While it’s little comfort to those taking losses, this kind of downturn is actually quite typical—a natural market correction rather than an outright crisis.

From Optimism to Reality

Investors initially cheered a business-friendly U.S. administration, fueling a surge in confidence and risk-taking. However, this enthusiasm has now given way to a sobering realization: President Trump is prioritizing the tougher, less growth-friendly policies first. The market correction is as much a reaction to policy shifts as it is to key personnel changes—such as the absence of former Treasury Secretary Scott Bessent and the growing influence of tech moguls like Elon Musk.

Before the election, markets had been pricing in a gradual economic slowdown, with expectations of modest Federal Reserve interest rate cuts. By mid-January, however, investors had fully embraced the administration’s 3% economic growth target, pushing the S&P 500’s one-year forward price-to-earnings (P/E) ratio from 17.45 times to nearly 21 times. That optimism has since evaporated, bringing the P/E ratio back down to its previous level of 17.45. In other words, the market has come full circle.

Corrections Happen—And They’re Healthy

Historically, 10% corrections occur roughly every 18 months, with the last one wrapping up in October 2023. These downturns are often necessary adjustments, bringing inflated valuations back in line with economic fundamentals. A key moment came during Trump’s recent Fox News interview, where he refrained from offering reassurances to the markets. This was in stark contrast to Commerce Secretary Howard Lutnick’s previous attempts to keep the S&P 500 above its election-day level. By Sunday, Trump appeared comfortable letting markets fall below that threshold—and they did.

Investor Sentiment and the Road Ahead

It would be misleading to suggest that investor confidence has disappeared entirely. In fact, the surge in risk-taking predated Trump’s presidency, particularly in the tech sector. Throughout 2024, tech investors voiced concerns about excessive spending. Investors tend to favor immediate gains over the long-term grind required for sustainable earnings growth. The current message from Washington is clear: the U.S. economy is resilient enough to endure short-term pain. However, markets are signaling that some business-friendly policies are needed sooner rather than later.

Trump’s Fox interview could serve as a crucial turning point, bringing clarity to the administration’s stance. With the S&P 500 now below its November 4 closing level, valuations have reset to reflect more realistic economic growth expectations in the 1.5% to 2.0% range. Lower bond yields, declining oil prices, and a market that aligns more closely with reality instead of lofty projections could set the stage for a recovery.

While this correction may feel painful, history suggests it is part of the normal market cycle. The key question now is whether policymakers will introduce measures to reignite investor confidence—or if markets will have to find their own way forward.