What’s Healthy About a ‘Healthy Correction’ in Stocks? Here’s What the Experts Say

A lot of people are talking about a market downturn lately. And they’re saying it might be a good thing.

Morgan Stanley chief Ted Pick recently said the firm would “welcome the possibility” of 10%-to-15% drawdowns. Investment strategists at Charles Schwab (SCHW), Edward Jones, and Invesco have called recent market churn “healthy” and an “opportunity.” The Wall Street Journal‘s Spencer Jakab said investors “could use a good, long bear market.” And crypto influencer Anthony Pompliano called bitcoin’s recent decline a “pretty healthy reset.”

Their remarks are landing as some Street veterans have started to call a bubble in stock markets, suggesting among other things that the big stocks of companies like Nvidia (NVDA), Microsoft (MSFT) and Amazon (AMZN) could be due for substantial haircuts—and suggesting that a return to cooler times might not be so bad.

It can seem counterintuitive. No one wants to see their portfolio shrink, right? But some experts say that after more than 15 years of seeing stocks go nowhere but up, the market could stand to take a hit—because, they say, corrections can deliver a needed behavioral check; wash out built-up leverage; and realign stock valuations with company fundamentals.

“I would rather not live through a nasty recession and long bear market,” Ritholtz Capital Management’s Ben Carlson wrote recently. “But I know those risks exist. … That’s why I diversify. I don’t use leverage in my portfolio. I don’t have concentrated positions. The name of the game in a long bear market is surviving, both mentally and financially, to live another day in the markets.”

Long bull markets can induce investors to take on more and more leverage—in short, borrowing money to amplify returns—in ways that can lead to trouble, Research Affiliates CIO of Multi-Asset Strategies Jim Masturzo said in an interview with Investopedia. The new cohort of retail investors has started to get “conditioned” to easy 10% returns, he said—so much so that they have started to chase outsize gains in a “swing-for-the-fences approach,” trading meme stocks and crypto.

“Once that starts to happen, if you have all this excess risk-taking and excess leverage, you’re going to get a much steeper, more violent, and harder correction than if, along the way, the market is, for a lack of a better analogy, eating its vegetables,” he said.

The Journal’s Jakab recently observed that markets haven’t seen a major bear market in a while, “creating dangerous complacency.” Historically, stocks would take roughly 81 months, on average, to reach a new high following a bear market accompanied by a recession, and 21 without. In the last 15-odd years, downturns lasted less than eight months before hitting prior peaks. After the Liberation Day downturn, the S&P 500 posted a fresh high just four months later.

In light of investors’ growing concerns about AI stock valuations—and others flat out calling a bubble—Ocean Park Asset Management CIO James St. Aubin would be more concerned if the S&P 500 rallied 50% from these levels than if it fell 25%.

“You don’t want to see complete euphoria in the market,” he said.

The S&P 500’s forward price-to-earnings ratio as of October-end was 22.9, higher than its 30-year average of 17.1, according to JPMorgan Asset Management. While the index has given back some of its gains since, that figure—recently at 22.8, per MacroMicro—remains aloft.

Even if the S&P lost a quarter of its value, St. Aubin noted, it wouldn’t register as what he called an “‘Oh my God, this is going to destroy my financial plan’ type event.” The benchmark index would be around 5,000, a bit higher than the lows seen in April—and it would remind investors that markets go in both directions.

Stocks don’t necessarily need to drop, according to St. Aubin. They could instead move sideways and let companies’ fundamentals catch up, he said—but it’s hard not to be cautious when investors are pricing those businesses to perfection without any degree of certainty that they’ll pan out.

“Everything has to go right for those valuation multiples to make sense,” he said. “When [the market] resets, earnings growth expectations—and there are those who say they are very optimistic—go back to something more achievable, a little bit more realistic.”