What's Next for S&P 500 ETFs? History and Valuation Offer Clues

The S&P 500 is experiencing a challenging year due to aggressive U.S. tariff policies and occasional ups and downs in Big Tech stocks.However, after slipping into a correction territory in April due to a heightened trade war saga, the S&P 500 has finally staged a remarkable comeback in May.

The key U.S. equity index has gained 15.6% over the past month (as of May 19, 2025). Even Moody’s recent downgrade of U.S. debt couldn’t dent the winning momentum of the S&P 500 (read: ETF Strategies to Follow on Moody's Downgrade of U.S. Debt).

Will April Correction Cause at Least 18% Return in Next 12 Months?

While tariff fears were blamed for the recent selloff, the market was likely due for a pullback after a strong run late last year and into early 2025. Either way, it presented a buying opportunity, just like most pullbacks and corrections do.

While declines are painful, they’re normal in bull markets—and often set the stage for strong recoveries. Every bear market in history has been followed by a new bull market. Since 1950, whenever the S&P 500 fell 10% in just two days (like what happened in April 2025), it has offered at least 18% returns over the next 12 months, with the highest being 59% (in 2020).

The S&P 500’s 10% crash within just two days has occurred six times since 1950. The past five corrections have resulted in a positive outcome within 12 months. On average, the S&P 500 has bounced back by 32.6% within the next 12 months, following all double-digit, two-day declines. We expect history to repeat itself this year.

Delve Deeper Into Valuation

The U.S. stock market entered 2025 at one of its priciest valuation multiples in history, when back-tested more than 150 years, per Motley Fool, as quoted on Yahoo Finance. The Shiller price-to-earnings (P/E) Ratio -- also known as the cyclically adjusted P/E Ratio, or CAPE Ratio -- has averaged a multiple of 17.24 since January 1871. In December 2024, it nearly hit 39.

Historically, Shiller P/E ratios above 30 on the S&P 500 have often preceded market declines of 20% or more. When volatility picks up, companies with premium valuations tend to get hurt first. The problem is that these pricey businesses are often responsible for leading the stock market's rally. And when these jewels take a hit, the entire market succumbs to a slowdown.

Mag-7 to Remain in Fine Fettle

This time around, stock market Jewels are “Magnificent Seven” or Big Tech stocks, which are thriving on their artificial intelligence (AI) euphoria. The AI boom is in fine fettle and will keep expanding no matter what happens on the tariff front.

Agreed, the rise of low-cost AI companies like DeepSeek posed a threat to Big Tech stocks earlier this year. The solid capex plans announced by Big Tech stocks during the first-quarter earnings season indicate their conviction in spending patterns (read: Why Big Tech ETFs Still Remain Great Bets).

Bet on S&P 500 With a Long-Haul View

Lest we forget, the average S&P 500 bear market lasts only about 286 calendar days, or roughly 9.5 months. In contrast, the typical bull market spans around 1,011 days — about 3.5 times longer. Regardless of threats emerging right now, history indicates that staying optimistic about the S&P 500 with a long-term view pays off greatly.

S&P 500 ETFs in Focus

Against this mixed backdrop, investors may track S&P 500 exchange-traded funds (ETFs) such as Vanguard S&P 500 ETF VOO, iShares Core S&P 500 ETF IVV, SPDR S&P 500 ETF Trust SPY and Invesco S&P 500 Momentum ETF SPMO.

Investors can also play the growth part of the index with SPDR Portfolio S&P 500 Growth ETF SPYG and the value part of the index with SPDR Portfolio S&P 500 Value ETF SPYV. SPDR Portfolio S&P 500 High Dividend ETF Fund SPYD is a good bet for the dividend plays of the index.

Investors with a strong stomach for risk can bet on leveraged S&P 500 ETFs such as Direxion Daily S&P 500 Bull 3X Shares SPXL, ProShares Ultra S&P500 SSO and ProShares UltraPro S&P500 UPRO, with a short-term view, especially if the index is trending upward.

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This article originally published on Zacks Investment Research (zacks.com).

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