For decades, the rule of thumb has been simple: a drop of 20% from a recent peak means a bear market. But a wild July for AI-linked stocks has prompted Wall Street to question whether that definition still holds in an era of rapid, technology-driven swings.
The Philadelphia Semiconductor Index (SOX) and South Korea's KOSPI both fell roughly 20% in July, according to Reuters. Yet even at their lowest points, both indexes were still up sharply for the year—the SOX by about 46% and the KOSPI by about 25%. That combination—a steep decline that still leaves an index far above where it started—has strategists rethinking what a bear market really means.
The classic definition gets messy
The traditional bear market threshold is a 20% decline from a recent high. It's a simple, memorable marker that has helped investors and the media categorize market conditions for generations. But that simplicity can be misleading when an index has already climbed a long way.
Consider the SOX: it surged on the back of explosive demand for AI chips and related technology. A 20% pullback from that elevated level still leaves the index well above its level at the start of the year. The same logic applies to the KOSPI, which has been lifted by South Korea's heavyweight semiconductor makers.
Art Hogan, chief market strategist at B. Riley Wealth, a US wealth manager, called the bull/bear labels “lazy.” Steve Sosnick, chief strategist at Interactive Brokers, a US broker, said the shorthand fits broad markets better than it does AI-linked sectors, which can move with unusual speed and volatility.
Their point: a single percentage threshold may not capture the nuance of markets that are being driven by a handful of high-flying technology names. A 20% drop in a broad index like the S&P 500 might signal genuine economic distress, but a similar drop in a narrow, momentum-driven sector index could simply be a sharp correction within a longer uptrend.
Why this matters for everyday investors
For ordinary investors, the debate over labels is more than academic. How we define a bear market shapes how we react to market moves—and how we feel about our portfolios.
If you hear that a major index has entered a “bear market,” you might be tempted to sell in a panic. But if that same index is still up 25% or 46% for the year, the reality is far less alarming. The label can create unnecessary fear, leading investors to make hasty decisions that lock in losses.
Conversely, the old definition might also cause investors to underestimate risk. A 20% drop in an AI-heavy index could be a warning sign that the sector is overheating, even if the index remains above its year-ago level. The label “correction” might sound less serious, but the underlying volatility is real.
Strategists suggest that investors should look beyond simple thresholds and consider the broader context: how far an index has run up, what is driving the decline, and whether the fundamentals that supported the rally are still intact.
What to watch next
The debate comes as markets continue to grapple with cooling volatility after big tech earnings and as investors weigh the impact of a busy week of jobs data and tech earnings. The AI trade has been a major driver of market gains this year, but it has also brought heightened sensitivity to any signs of slowing demand or rising costs.
For now, the takeaway for investors is to be cautious about relying on any single label. Whether a market is officially in a “bear” or “bull” phase matters less than understanding the forces behind the move and how they affect your own financial goals.
As Hogan and Sosnick suggest, the old dictionary may need updating. In a market shaped by AI-driven whiplash, a 20% drop might be just a bump in a longer climb—or it could be the start of something bigger. The key is to look at the whole picture, not just the percentage.
