The S&P 500 Should Be Higher in a Year After This Turmoil Based on the History of Market Volatility Spikes

Wells Fargo Investment Institute is encouraging investors to stay calm during the current bout of market volatility, emphasizing that such turbulence can actually present significant opportunities. While the market has been shaken by a fresh wave of tariffs, analysts argue that those who maintain a long-term perspective could reap notable rewards over the next year.

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The recent sell-off has been dramatic. The S&P 500 dropped 9% in the week when President Donald Trump announced new “reciprocal” tariffs, sparking fears of a deeper economic fallout. This tariff-driven volatility has rattled many investors, but Edward Lee, an analyst at Wells Fargo Investment Institute, believes this reaction should be viewed in a different light.

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In a note released Monday, Lee acknowledged that concern is a natural response in times of heightened uncertainty. However, he also pointed out that history shows volatility often sets the stage for above-average market returns. “It’s understandable to feel uneasy, but we encourage investors to look at the current environment as a chance rather than a threat,” Lee wrote. “Periods of elevated volatility have historically coincided with stronger forward returns.”

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To support this point, Lee included data from Wells Fargo that looks at how the S&P 500 has performed historically across different volatility levels, measured by the CBOE Volatility Index, or VIX. The VIX is often referred to as Wall Street’s “fear gauge” and tends to rise when market uncertainty or fear increases.

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The data shows a compelling pattern: when the VIX is above 40, the average 12-month return for the S&P 500 has exceeded 30%, with positive returns occurring more than 90% of the time. In early April, the VIX briefly surged past 60 and has remained at elevated levels since. For reference, the VIX was just above 17 at the start of 2025 but was trading near 25 by midday Tuesday.

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These elevated volatility readings are a signal, not necessarily of doom, but of potential opportunity, according to Lee. While investors often interpret rising volatility as a reason to retreat, the data suggests it may be an optimal time to remain engaged—or even increase exposure, particularly in high-quality investments.

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Looking ahead, Lee sees a promising environment forming over the next six to 18 months. Despite current concerns around tariffs and slower global growth, he believes that the U.S. economy will continue to expand. Alongside this growth, corporate earnings are expected to rise as well, helping to offset many of the negative headlines dominating the news cycle. These improving fundamentals could contribute to a recovery in investor confidence and market performance.

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As such, Lee recommends that investors take a strategic approach to their portfolios. Specifically, he suggests leaning toward quality stocks—those with strong balance sheets, reliable earnings, and competitive advantages. In terms of size, he prefers large- and mid-cap U.S. equities over smaller-cap stocks. The reasoning is that larger companies tend to be more stable and better equipped to weather economic headwinds such as trade restrictions or interest rate hikes.

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On a global level, Wells Fargo Investment Institute sees more opportunity in developed international markets—such as Europe and Japan—compared to emerging markets. The latter are often more sensitive to global shocks and tend to underperform in periods of heightened geopolitical or trade uncertainty.

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This guidance reflects a broader theme of resilience and discipline during periods of market stress. Lee’s message is not to ignore the challenges—such as tariffs, inflation, and geopolitical tensions—but rather to recognize that volatility is an inherent part of investing. Those who remain steady and focus on long-term fundamentals, rather than short-term fear, are often rewarded.

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In summary, Wells Fargo’s view is clear: while markets are currently turbulent, that doesn’t mean investors should run for cover. Instead, they should consider rebalancing their portfolios with an eye toward quality and long-term growth potential. If history is any guide, today’s volatility could lay the groundwork for tomorrow’s gains.

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