Nasdaq drops into correction territory — here’s what typically happens next

The Nasdaq Composite plunged into correction territory on Thursday. History shows more selling can follow in the near term, but a recovery eventually takes hold three months later.

The tech-heavy index slid more than 5% on Thursday, closing more than 11% below its record reached last month. On Wall Street, any decline greater than 10% is a correction. A 20% pullback qualifies as a bear market.

Across 10 previous correction episodes over the last decade, selloffs in 2025, 2022, 2020 and 2018 were followed by further rough selling over the next one month. But the Nasdaq was back to rally mode again after six months for all those occasions except one: 2022.

Overall, the Nasdaq gained an average of 9.41% from the correction bottom over the following three months and 17.03% over six months.

The catalyst for this correction was Democrats sweeping the House and Senate in Tuesday's midterm elections. The party also made significant gains in Texas, where Gina Hinojosa won the race for governor after campaigning on an immediate moratorium for data center development.

Investors are now weighing whether tighter state-level restrictions could slow data center construction, putting pressure on companies tied to the artificial intelligence trade.

Frank Cappelleri, founder of CappThesis, pointed to past midterm election cycles for guidance and found that points to more volatility in the near term as well.

The chart analyst said the Nasdaq was higher 12 months after the election in all but one of 13 midterm cycles since 1974.

"The caveat is that the path can be a volatile one," he said.

Cappelleri pointed to 2018, when the Nasdaq rallied the day after Democrats won the House. A sharp December sell-off followed, but the index was ultimately about 15% higher a year after the election, he said.

Chip stocks tumbled Thursday, with the iShares Semiconductor ETF (SOXX) falling 12% and for its worst day since the Covid-19 breakout of March 2020.

— CNBC's Fred Imbert contributed to the report