The Average Return of the S&P 500 is a key indicator for investors looking to gauge long-term stock market performance. First of all, the S&P 500 Index is a market-capitalization-weighted index representing the 500 largest companies listed on U.S. stock exchanges. It’s widely considered the best gauge of the U.S. equity market’s performance.
Average Stock Market Return: The S&P 500 has historically provided an average annual return of about 10% to 11% over the long term, including price appreciation and dividends. This figure represents a key metric for investors, offering a baseline for expected returns when investing in U.S. stocks.
Historical Average Return of S&P 500
The historical average return of the S&P 500 provides insight into how this index has performed over time.
- Long-Term Performance: From its inception in 1926 through 2023, the S&P 500 has delivered an average annual return of approximately 10% to 11%. This includes the impact of major economic events, wars, recessions, and market crashes, reflecting the index’s resilience over time.
- Decade-by-Decade Returns: The S&P 500 has experienced significant variations in its average annual returns over different decades. For example, the 1990s saw an exceptional average return of around 18% per year due to the tech boom. In contrast, the 2000s, often referred to as the “lost decade,” saw an average return close to 0%, largely due to the dot-com bust and the 2008 financial crisis.
In the last 32 years, the S&P 500 index (in EUR) had a compound annual growth rate of 11.00%, a standard deviation of 15.26%, and a Sharpe ratio of 0.68.
| Period | Average annualised return | Total return |
|---|---|---|
| Last year (2023) | 24.3% | 24.3% |
| Last 5 years | 15.7% | 107.1% |
| Last 10 years | 15.6% | 325.1% |
| Last 20 years | 11.1% | 725.5% |
How Inflation Affects S&P 500 Returns
Inflation is a crucial factor that can significantly impact the average return of the S&P 500.
- Real vs. Nominal Returns: The nominal return of the S&P 500 does not account for inflation, while the real return does. For instance, if the S&P 500 delivers a nominal return of 10% in a year with 3% inflation, the real return would be approximately 7%. Over time, inflation can erode the purchasing power of your returns, making it essential to consider real returns when evaluating investment performance.
- Periods of High Inflation: During periods of high inflation, the S&P 500’s real returns may be significantly lower. For example, in the 1970s, inflation averaged around 7%, which reduced the real returns of the stock market. However, over the long term, the S&P 500 has generally outpaced inflation, helping to preserve and grow wealth.
So far in 2024 (YTD), the S&P 500 index has returned an average of 19.09%.
How Market Timing Affects S&P 500 Returns
Market timing can have a substantial impact on the average return of the S&P 500 for individual investors.
- The Dangers of Market Timing: Attempting to time the market—buying stocks at market lows and selling at market highs—can lead to missed opportunities and lower overall returns. Historical data shows that investors who stay invested in the market consistently tend to outperform those who attempt to time the market.
- Missing the Best Days: Missing just a few of the best days in the market can significantly reduce your returns. For example, missing the 10 best days in the market over 20 years can cut your average annual return by nearly half. This highlights the importance of staying invested for the long term to capture the full potential of the S&P 500’s returns.
Does the S&P 500 Return Include Dividends?
Yes, the average return of the S&P 500 often includes dividends, which can significantly boost overall returns.
- Price Return vs. Total Return: The price return of the S&P 500 reflects the change in the index’s value based solely on stock prices, excluding dividends. The total return, on the other hand, includes both price appreciation and dividends reinvested. Historically, dividends have contributed about 2% to the total return of the S&P 500 each year.
- Impact of Dividends: Reinvesting dividends can lead to compound growth, which enhances the overall return on your investment. Over decades, this compounding effect can significantly increase the value of your portfolio compared to relying on price appreciation alone.
What to Expect the Stock Market to Return
While historical returns provide a benchmark, future average returns of the S&P 500 may vary based on several factors.
- Current Market Conditions: Economic growth, interest rates, corporate earnings, and global events will continue to influence the S&P 500’s performance. While the long-term average return of 10% is often used as a guideline, actual returns in any given year can be much higher or lower.
- Long-Term Outlook: Investors should maintain a long-term perspective when investing in the S&P 500. Over periods of 20 years or more, the market has historically delivered solid returns, despite short-term volatility. This makes the S&P 500 a reliable component of a diversified investment strategy.
Related Articles:
- What is S&P 500 and why invest in it?
- What companies are in the S&P 500?
- How to buy a stock? A beginner guide for new investors
Sources:
- https://curvo.eu/backtest/en/market-index/sp-500?currency=eur
- https://www.nerdwallet.com/article/investing/average-stock-market-return
- https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
- https://tradethatswing.com/average-historical-stock-market-returns-for-sp-500-5-year-up-to-150-year-averages/
