This week’s market sell-off was the worst since the “Liberation Day” tariff announcement in April 2025. On Thursday the S&P 500®, the Nasdaq Composite®, and the Dow Jones Industrial Average erased their initial post-midterm gains and ended the day down 4.36%, 5.52%, and 3.44%, respectively. The tech-heavy Nasdaq also fell into correction territory, sliding more than 10% below its previous month record.
Market downturns can understandably feel stressful in the moment. So what caused the sell-off this week, and what should investors do in response?
Before we get into the specifics, we want to state the important takeaway upfront: history shows market volatility isn’t a reason to panic, and investors have generally been well served by staying invested through uncertainty. Read on for more details.
What caused this week’s sell-off?
Despite a stock market rally on Wednesday immediately following the midterms, stocks connected to data centers—which were heavily rejected by midterm voters—saw steep declines. Chipmakers, semiconductors, and neocloud companies were hit particularly hard. These concerns then spread to the broader tech sector as investors weighed the impact of less AI capital expenditure, a deceleration in the data center buildout, and changing AI sentiment on the industry at large.
Excitement about AI’s potential impact on economic growth have been pushing markets up in recent months, driving the Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) to make up roughly one-third of the S&P 500. But on Thursday those seven stocks lost a combined $1 trillion in market value, showing how concerns about the future health of one large sector can have wide ripple effects, which is part of what we saw this week.
Other factors driving a heightened atmosphere of investor concern include persistent inflation, ongoing geopolitical conflicts, and uncertainty about AI-driven economic growth in a new political landscape.
For a deeper dive into this week’s market drivers, see the latest issue of Vested Interest, our economics newsletter.
How should investors react?
They shouldn’t! While market downturns are never pleasant in the moment, as we’ve written before, history shows that markets tend to rise over time. So staying the course, even through a steep sell-off, is likely to work out in your favor. We encourage investors to see short-term stock market declines as an opportunity: If you’re able to keep putting money in the market while it’s down, you’ll be in a better position to reap the benefits when it eventually climbs back up again.
What about finding the “right time” to invest? You might hear people talking about “buying the dip” or waiting until the market bottoms out to begin investing again. This sounds good in theory, but it is hard to do in practice. That’s because it’s nearly impossible to tell whether the market has hit bottom or if it will continue to fall until after the fact.
There’s also the opportunity cost of sitting on uninvested cash while waiting for a bottom. Academic research has shown that trying to time the market doesn’t work – even most professional investors can’t consistently get it right. That’s why we think it’s wise to stick to your investing plan regardless of what the market is doing. As you’ve surely heard before, time in the market beats timing the market.
Instead of changing your strategy, we think it’s smart to keep investing and focus on the three key factors within your control:
- Diversification: Periods of volatility are a good reminder of the importance of diversification—or buying a wide range of investments instead of focusing on a single company, sector, or geography. Diversification can increase your risk-adjusted returns and, to some extent, insulate you from losses. When you feel insulated from losses, it’s easier to stay invested, which is key to investing success.
- Taxes: Market turbulence offers a silver lining in the form of tax-loss harvesting and direct indexing, which is designed to take advantage of market dips to help increase your after-tax returns. It’s why we built automated Tax-Loss Harvesting into all of our taxable managed accounts, and is when we see it generate the most value for our clients. During yesterday’s downturn, our software harvested $7.4 million in losses, and we estimate it has saved clients $1.3 billion in taxes since inception (through 06/30/2026).
- Fees: Regardless of how the market behaves, one of the easiest ways to hurt your returns is to overpay in advisory fees and ETF fees (known as the “expense ratio”). Because these fees can add up over time, Wealthfront charges 0.25% or less for our investing products (depending on which specific product you use), which is about a quarter of what a traditional financial advisor will change. And when we select ETFs for your portfolio, we focus on keeping those costs low, too.
Ultimately, our goal is to help you grow your long-term wealth regardless of the market environment. That’s why our philosophy is to keep you focused on what you can control, and to help you avoid the temptation to take action that could hurt your outcomes later. We hope that by sharing broader context on market behavior and building products that automate these best practices, we can make it even easier to achieve your financial goals with greater confidence.
Disclosure
The information contained in this blog is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront Advisers and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short-term or long-term).
Tax-loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that trading attributed to tax-loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions.
$1.3B in estimated tax savings methodology: We calculated the estimated tax savings based on our clients’ current self-reported income, state of residence, and tax-filing status. From that, we inferred a combined federal and state tax rate (if applicable) for each client. We then multiplied each client’s rate by their harvested losses and added those numbers up to get the $1.3B in estimated tax savings since inception (01/2012) through 06/30/2026. This calculation also assumes that there are enough capital gains to be fully offset by the harvested losses and that current tax laws and rates remain in effect. The actual tax savings realized by any individual client will vary based on their specific tax situation, investment activity, and market performance. These figures are an estimate of potential tax benefits and are not guaranteed. Investors should consult with a tax professional regarding their specific circumstances.
Diversification, buy-and-hold strategies, and automated investing do not guarantee profit
or ensure against loss. Investor experiences can vary widely based on strategies and time horizons. Dollar-cost averaging does not assure a profit or protect against loss in declining markets. It also involves continuous investment in securities, so you should consider your financial ability to continue your purchases through periods of low price levels. Index funds and ETFs generally offer broad diversification, but may still expose investors to specific market, sector, or asset class risks. Wealthfront provides investment management services but may not achieve returns comparable to those of the general market or specific benchmarks.
Passive investing may help minimize certain risks, it does not eliminate market risk or guarantee higher returns. Unlike retirement accounts (such as 401(k)s and IRAs), taxable investment accounts may be subject to capital gains taxes on withdrawals, and short-term market fluctuations could impact returns. Personal circumstances, goals, and time horizons can affect investment outcomes. Please consult with a professional tax adviser to discuss your specific situation.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Nasdaq-100 Index® is a modified market-capitalization-weighted index composed of 100 of the largest non-financial companies listed on the Nasdaq Stock Market. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Please see our Full Disclosure for further information.
Investment advisory services are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and brokerage products and services are provided by Wealthfront Brokerage LLC (“Wealthfront Brokerage”), member FINRA/SIPC. Wealthfront Software LLC (“Wealthfront Software”) offers a free software-based financial advice engine that delivers automated financial planning tools to help users achieve better outcomes.
Wealthfront Advisers, Wealthfront Brokerage, and Wealthfront Software are wholly owned subsidiaries of Wealthfront Corporation.
Copyright 2026 Wealthfront Corporation. All rights reserved.
About the author(s)
Alex Michalka, Ph.D, has led Wealthfront’s investment research team since 2019. Prior to Wealthfront, Alex held quantitative research positions at AQR Capital Management and The Climate Corporation. Alex holds a B.A. in Applied Mathematics from the University of California, Berkeley, and a Ph.D. in Operations Research from Columbia University. View all posts by Alex Michalka, Ph.D
