Stock market volatility often signals future gains

[UNITED STATES] Sharp swings in the stock market can be unnerving, but history suggests they often pave the way for significant gains, according to market analysts. In light of this, many investors may be better off staying the course — or even adding to their positions — rather than retreating from equities during turbulent periods, analysts advise.

Historical patterns observed during past crises, such as the 2008 financial meltdown and the 2020 pandemic-driven selloff, support this view. In both cases, severe downturns were followed by powerful market recoveries, eventually driving the S&P 500 to record highs. Analysts say these examples underscore a consistent theme: volatility, while uncomfortable, frequently sets the stage for future growth.

A key barometer of market stress, the CBOE Volatility Index — or VIX, commonly referred to as Wall Street’s "fear gauge" — tracks expected volatility in the S&P 500. Data from the Wells Fargo Investment Institute indicates that when the VIX spikes above 40 — a level signaling significant turbulence — the S&P 500 has historically risen by an average of 30% over the following year.

Moreover, in those instances, the odds of positive returns one year later have exceeded 90%, based on data from January 1990 through April 16, 2025.

Still, experts caution against assuming the past will always predict the future. Economic conditions, including inflation, interest rates, and geopolitical uncertainty, can shift market dynamics. “The past is a useful map, but it’s not the territory,” said David Kelly, chief global strategist at J.P. Morgan Asset Management. “Investors should stay diversified and avoid overreacting to short-term swings.”

Edward Lee, an investment strategy analyst at Wells Fargo, echoed the sentiment in a recent note, describing volatility as a “potential opportunity.” He added, “Concern is normal, but history has taught us that periods of higher volatility have historically led to higher returns.”

Why does higher volatility often precede stronger returns? Lee explained in an email that volatility tends to coincide with periods of steep market declines and widespread investor fear — both of which often create favorable entry points. “These periods typically lead to higher probabilities of investing success over the next 12 months,” he said.

Resilient corporate earnings also play a crucial role. Even amid turmoil, many companies continue to post strong profits, which can help lift stock prices once sentiment improves. “Earnings growth is the ultimate foundation for market recoveries,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. “If earnings hold up, the market tends to follow.”

Market volatility surged in early April following President Donald Trump’s surprise announcement of steep country-specific tariffs, triggering an 11% drop in the S&P 500 over just two days.

The VIX spiked to around 53 — ranking among its top 1% closes in history — according to Callie Cox, chief market strategist at Ritholtz Wealth Management. However, Cox noted that sharp downturns often lead to “relief rallies” as investors rush back in once it becomes clear the initial shock wasn’t as damaging as feared.

Looking back to 1990, Cox pointed out that roughly half of the S&P 500’s 14 declines of 10% or more ended within a week of the VIX’s peak close — and in three cases, the rebound began on the same day. “These types of selloffs are often V-shaped,” she said, referring to steep declines followed by rapid recoveries. However, she also warned that this time might prove different.

“We’re still trying to figure out where the new center of gravity is with trade policy,” Cox said. “The unexpected-news part of the selloff may be behind us, and for long-term investors, now could be the time to consider buying. But it’s important not to assume this is the bottom. History isn’t always gospel.”